|
I have received several questions over the past few weeks
that deserve attention. Individually, the answers are not long enough to constitute a
column (even with my long-windedness). So, I will answer them in a short-answer format. In
the future, to add variety, perhaps some of you could ask questions requiring
multiple-choice or true-or-false answers.
How often do you suggest rebalancing?
In theory, you should rebalance as frequently as possible.
Indeed, some pension plans rebalance daily (usually using futures). However, my research
has found that systematic rebalancing on an annual basis accomplishes nearly all of the
desirable goals of risk control. You also may want to consider rebalancing after large
market movements, but that is often the most difficult time, psychologically (as evidenced
by the next question).
Tech stocks have already taken some hits this year.
Would it be wise to rebalance now or wait for additional growth?
My answer to this type of question is always the same
— never delay; do it now. If it's a good investing idea in the future, it's a good
idea now. Who knows for sure whether there will be additional growth?
Would it be acceptable to rebalance by adjusting your
contributions to an account, investing less in the faster-performing portion of your
portfolio, and increasing your contribution to the slower performer? This would prevent
your having to sell off a portion of the portfolio in order to rebalance, which is very
important if your portfolio is not in a tax-deferred account.
This is an excellent question and answer combined, and it
is precisely how one should balance an account that is taxable, or for which you pay
commissions. However, within a 401(k) plan, it is fine to rebalance by moving money among
funds.
When it comes to wireless companies, what's the
difference between CDMA and TDMA?
I included this one to show you the variety of questions I
receive. I haven't a clue what the answer is, and hopefully will live a fulfilling life
despite my ignorance.
If I have an aggressive approach to investing, what
is a realistic average annual return estimate to use in a 401(k) calculator?
Stocks have averaged an annual return of 11 percent over
the past 70 years — that would not be a bad number to use.
In order to invest in bonds, would you suggest using
bond funds or individual bonds?
Although diversification is less important for bonds than
it is for stocks, most investors would find it difficult to properly diversify a bond
portfolio on their own. It would likely be less risky and cheaper to use a bond fund.
You haven't addressed the hardest question. It's not
"How did that guy on Survivor get through medical school?" It's "How did
Kim Basinger ever get a Best Actress award?"
You're right; those two questions, along with the possible
existence of extraterrestrial life, make up the trilogy confronting today's philosophers.
My daughter recently changed jobs and promptly
assigned me the responsibility of deciding what to do with the $59,000 in her 401(k) plan.
I decided on several mutual funds, and prepared the rollover IRA papers for her to sign.
Being very busy, she put it off. That was a piece of good fortune, because the market
declined over the next few months. If I had mailed those papers at that time, her IRA
would have been worth around $8,000 less. Any thoughts?
I'm happy for you, I really am, particularly since the main
task my daughter assigns me is keeping her younger brother away from her glitter makeup.
But, let's not confuse good fortune with good practice. Once a strategy is decided, delays
in implementation tend to hurt more often than they help. For example, similar
procrastination in 1998 would have cost your daughter $18,000 in lost gains.
In a divorce, am I entitled to part of my spouse's
401(k)?
Although these issues are out of my realm of expertise
(assuming there is such a realm), I do know that most divorce courts treat 401(k)
investments in the same way as any other asset.
Do you think online day trading or other risky things
would be a viable move for me? I am 50 years old, earn $50,000 a year and have $10,000 in
my 401(k) plan. I have three children (ages 7, 12 and 14) to put through college (with
scholarship help of course). Any suggestions you could give me to rapidly build up my
retirement funds would be greatly appreciated.
I'm sorry to say that there are no shortcuts. The surest
path to disaster is participating in get-rich-quick schemes. I know it's difficult to
start saving late. But, your best alternative is to invest as much as you can in funds,
and make do with your proceeds. In all sincerity, you would probably be better off buying
lottery tickets than day trading your account.
* * * On a more personal note, one of the best aspects of
my job is reading the e-mail I receive from readers. I promise you that I read every note.
I like the questions; I like the suggestions; heck, I even liked the message from the guy
who criticized my spelling (what I enjoyed most were his grammatical errors). From reading
your messages, I learn about the true concerns of today's investors. This makes me, and
mPower (my employer) better financial advisors.
If the issue you raise is general enough to be of broad
interest, I eventually address it in this forum. If your question has a short and simple
answer, I try to respond personally.
But, I hope you understand that I can't answer every
message; they are too numerous. Please keep the questions coming anyway, though, because
they are always of interest.
Oh, and if you are wondering whether those seemingly idle
offers of cash and favors help ... they do. :)
 Lummer's Logic Archives
The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
401Kafe.com is the
premier online community resource for 401(k) participants
Copyright ý 1996 - 2000 mPower. All Rights Reserved.
|
