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It’s that time!
No, no. Not turkey-tinsel-trinket-time, but 401(k) time. Whether you’re a full-time employee coming up on an annual benefits review or you’re investing on your own, growing your money should be just as important as saving money while shopping for the holidays. My prescription: Take at least one hour this month to work on your retirement account(s). Let me help.
My iVillage editor, Mary Kate Frank, dared to open her “books” to me and act as our guinea pig.
She is a 33-year-old single woman beginning to invest for the first time [Ed note: yikes!]. She’s currently contributing 6 percent to her 401(k). When she was asked over the phone to make her elections (to choose where and how her money should be invested), she admits she “panicked” and just “threw a little everywhere.” And that’s exactly what she did: 10 percent in an income fund, 20 percent in a money market, 10 percent in short-term bonds, 40 percent in a strategic fund, 10 percent in a bond index and 10 percent in a treasury index.
Here’s what she did right:
She signed up
She committed a decent amount (6 percent) every month.
She didn’t put all the money into one thing, like one fund or one stock (like company stock).
Here’s what she can do at this time of year to be even more “right”:
She can put even more in. Since Mary Kate didn’t start investing at 23 but at 33, she should squeeze just a bit more out of her budget every month to play catch-up. Ten percent would be fantastic, but I’ll settle for her to go in slowly and start with an increase to 8 percent. When you’ve lost time, even if you’re not looking to retire in 40 years, make up for it with higher contributions.
She can get (f)risky. Mary Kate’s current allocation looks like a 60-year-old’s. [Ed note: ha!] She’s got 70 percent of her money in bonds, which tend to be less risky than investing in the stock market. This makes sense when you can’t afford to put too much of your money at risk, such as when you’re close to retirement, but it doesn’t make sense when you have more than 20 years until retirement.
My buddy, the amazing financial adviser Diana DeFrate, of DeFrate & Paavola Wealth Managers, has a saying when it comes to diversification: “The goal of diversification is to never own enough of one investment to be able to make a killing on it or to be killed by it.” For someone in Mary Kate’s situation and with her investment options, Diana recommends two large-cap funds (this is stock), one small-cap (more stock), one international fund (stock) and three bond funds. But if Mary Kate wants to risk a bit more, like I would, I’d recommend she put only 10 percent in the money market and another 15 percent or so in bond funds, with the rest between the stock funds (large cap, small cap and international).
What does this mean for you? Don’t just look at the 12 or 14 options you have and spread your money around evenly thinking that that’s diversification. Each choice falls into one of three baskets, with differing levels of risk within them: stocks, bonds, money market (cash). Read up on each and every option you have and know how much you should have in each “basket.” If you have more than 20 years until retirement and you don’t get sick at the thought of your money going up and down in value each day, you should have at least 50 percent or more of your money in stock funds. As you get closer to retirement, shift your balance more toward less risk -- in bonds and money markets. And don’t forget to “peek and tweak” at least twice a year so where your money matches your needs.
This is just the tip of the iceberg both for you and Mary Kate, but it’s a good start. Now, happy rebalancing!
Got a question for iVillage personal finance expert Carmen Wong Ulrich? Email her at firstname.lastname@example.org.