Steps To Review Your IRA & 401k Investment Accounts
Your IRA’s and 401k Investments Need Attention
You already know that you need to review your investments on a regular basis. Retirement experts suggest that investors review Individual Retirement Accounts (IRA’s) and 401k investments at least once a year. The purpose is to help you monitor the returns, trends, market swings as well as any expense changes that may have occurred. If you review more often that once a year, the time period to evaluate the key indicators will be too short to provide any value. To avoid driving yourself crazy, stick to once a year. The best way to make sure you do it on a regular basis is to pick the same time every year. Maybe your annual routine for investment review is at year-end or during tax season or even your birthday…just pick a time and stick to it.
Now, what to look for when you carve out time to review your investments. Investments can be complicated so let’s peel back some of the layers and make them less complicated for you.
Step #1 – Review Your Investment Returns
Compare your investment returns with the returns of the last year, prior 3 year, 5 year and 10 years. If the entire market is in a slump and negative returns are currently the norm, if your investments are showing negative returns also, you are right in line with market conditions. So in addition to investment returns, here is some other criteria to evaluate your investments. performance.
Step #2 – Review Other Criteria
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Market Sector
You need to review the market sectors your investments are in. A market sector is just a group of businesses that sell similar products and services but directly compete with each other. The market can be segmented into technology, financials, health care, energy, telecommunications or industrials.
Periodically compare what sectors your investments are invested in to see if the performance is close to the market in general. If the general market sectors are growing and your personal investment within that same market sector is not, you may want to reevaluate. If you are weighed too heavily in one investment, you may need to reevaluate. You want a balanced portfolio, and if your investments are over concentrated in one area, the portfolio is not balanced.
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Risk
An unbalanced investment portfolio can be a risky one. If you have all of your assets invested in energy stocks and that sector goes into a slump, your portfolio will suffer. So avoid that investment no-no by trying to not put all of your eggs in one basket. Spread your investment dollars around, diversify into different market sectors.
Risk level is a personal thing. Everyone handles investment risk differently. How much investment risk are you comfortable with? If investment risk keeps you awake at night, that’s okay, you can have a diversified portfolio without increasing your risk level. Just remember that high risk does not always equate to high returns.
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Investment Objectives
Step #3 – Evaluate Expenses
The professionals who manage your 401k investments and Individual Retirement Accounts charge fees for their services; they don’t work for free. Don’t be afraid of fees. Fees are fine; just make sure they are not excessive. If your investments are in stocks, there may be an account management fee. If you own mutual funds, there may be fees charged by the mutual fund company, plus an account management fee. If your investments are in 401k plans or IRA’s, the fees may be lower. Companies will show you their fees, you just have to ask. Fees are always listed in an investment prospectus. Every mutual fund has to put out a prospectus. You can usually find the fund’s prospectus on the mutual funds website.
Step #4 – Review Your Portfolio Diversification
A diversified portfolio means a portfolio spread out among different asset classes. The rule about not wanting all of your assets invested in one market sector holds true with asset allocation; you do not want all of your assets invested in one asset class. There are 3 basic asset classes: stocks, bonds and money market or a cash equivalent. It is a good financial move to have some money invested in stocks, some in fixed income or bonds and some in a money market or cash account. When stock performance is on the upswing, bonds decline and vice versa. And you keep some money in cash for balance.
Reviewing your asset allocations on an annual basis is a good practice to get into. The market changes so quickly and so often that a lot can happen. With a turbulent market your diversification may become skewed so you may need to rebalance the account once a year. Rebalancing is a function of keeping your investment mix or combination the same. Some investment accounts allow you to set up an automatic rebalancing feature.
Another type of diversification is to spread your investment dollars between large cap, mid cap, small cap, international and worldwide mutual funds. Each type of those mutual funds offers a different investment objective and strategy.
Moving Forward
You work and save during your working years so that when you retire you really do retire. The money you invest into your Individual Retirement Account and 401k investments should grow over time and get you ready for retirement. But as you can see, investment performance is not the only criteria to consider. Market sector concentration, risk level, investment objectives, diversification, investment account rebalancing and investment expenses are just as important as investment returns when you review your retirement investments. So while you are stockpiling your investment dollars getting ready for the day you get to retire, remember that. Don’t be like other investors who just focus on the investment returns and either buy or sell an investment at the wrong time and for the wrong reasons. Keep your annual reviews simple and consistent and you will have no problem keeping your investments on track.