I’ve looked under the hood of hundreds (maybe thousands?) of 401k’s. So I bet I already know how your 401k is invested.
Here’s how to fix it.
I’ll wager your 401k is invested in a target date fund.
Those are the mutual funds where you pick your retirement year and just load up the fund.
I don’t HATE these funds, but you can do better.
On the upside, target date funds kinda sorta get you invested correctly. Plus, “set it and forget” is better than not setting it and forgetting it.
On the downside:
1. MOST TARGET DATE FUNDS ARE EXPENSIVE – i.e. high expense ratios.
2. THE ALLOCATIONS AREN’T GREAT. Especially as you get closer to actual retirement the underlying investments can be too aggressive OR too conservative depending on the funds..
3. NO REBALANCING – The turbo charge on your money is buying low and selling high through systematic rebalancing. A target date fund is just one mutual fund. You can’t rebalance a one fund portfolio.
“But Rick, if I don’t use a target date fund, I won’t know how to invest it.”
I knew you’d say that. Here’s how to cheat the system.
(BTW if you’re a Financial Zen Member, we’ve already got you covered – either we manage it directly for you through Pontera or we’ve manually updated the allocation together.)
If you’re NOT a Financial Zen Member, here’s the cheat code.
Look at your Betterment or Wealthfront allocation and then copy it!
Just like Financial Zen, Betterment and Wealthfront use a KISS portfolio (keep it simple, silly), which includes just a handful – 10ish – funds.
Mirror your 401k as close as you can to your robo-advisor portfolios and call it a day.
If your 401k offers it, sign up for the self-directed 401k option which will ensure you get access to all the investment ingredients you need to mirror your robo-advisor portfolio.
And on a final note, if you work with a financial advisor and still have a target date fund in your 401k, fire them immediately.
Totally serious.
