How to Invest Your Retirement Assets

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There are many issues surrounding how to invest your assets. Typical considerations are how to invest in stocks, how to invest in bonds, how to invest in mutual funds and the “how to invest” list goes on. There are a plethora of “how to invest” considerations. If you’re planning for retirement, how to invest in mutual funds in your 401(k) is usually the top priority.

But if you have a 401(k) that includes mutual funds as an option, how do you decide how to invest amongst the myriad options that are available?

The Benefits of Mutual Fund Investing in Your 401(k)

The first step of investing in mutual funds in your 401(k) is to research the various mutual funds that are available to you. You can request a prospectus for each mutual fund or you can research each mutual fund online. The goal is to understand the options by researching investment style (e.g. large cap growth, small cap value, international, etc.), performance history, portfolio manager tenure, fees. and a host of other mutual fund measurements.

There are many resources online to help you research the mutual funds available in your 401(k):

Kiplinger’s Fund Finder — Kiplinger.com offers a tool that with a simple entering of the fund’s symbol, you have access to a host of performance, style and fee information.

Morningstar — Morningstar has several tools — some for free and others for a membership fee — that allow you to research in depth information about mutual funds.

Cake Financial — Cake offers several tools — one for free, one with a one-time fee and another for an annual fee — that will help you research mutual funds and track your funds.

Diversification and How to Invest in Your 401(k)

After you have researched the mutual funds that are available in your 401(k), you are ready to determine the proper diversification and allocation between your mutual funds. Should you own 100% equity funds, 100% bond funds or some combination of the two? Should you own all US equity funds or all international equity funds?

Vanguard — Vanguard’s “Investor Questionnaire” is a fine starting place to help you determine the proper asset allocation in your 401(k).

T. Rowe Price — After you’ve determined your proper asset allocation, you can take 10 minutes with T. Rowe’s Monte Carlo retirement income tool to help determine the likelihood that your savings will last throughout your retirement.

Target-Date Funds and How to Invest in Your 401(k)

A study in late 2008 by Deloitte and the Investment Company Institute showed that 72% of defined contribution plans (e.g. 401k plans) offered target-date funds. So, if you’re unsure of how to invest your 401(k) and you feel overwhelmed by dozens of options that are available, a target-date fund (also known as lifecycle funds) might simplify your life.

Target-date funds are often thought of as “set it and forget it” funds. For example, if you plan to retire in 20 years, you might buy a target-date fund that matches your time frame — that is, a target of 20 years. As you approach your retirement date, the fund moves its allocation to more conservative mutual fund investments (holding bonds and cash) and away from riskier mutual fund investments (holding equities). As the theory goes, set the investment in the fund and forget it — let the fund do all the work.