June 19, 2013
The long-running bull market may have instilled investor overconfidence in stocks when it comes to 401(k) accounts — or it is possible that people just don’t pay attention to the composition of their 401(k) plans. For whatever reason, a study from Fidelity Investments suggests that too many 401(k) accounts are too heavy in stocks and not sufficiently diversified.
As you approach retirement age, it is generally recommended that you reduce your exposure to stocks and shift toward less risky bonds and cash equivalents. The reasoning behind shifting is that a stock market correction, or a bear market, could leave you without enough time to recover lost assets. A proper balance should be set according to your financial needs and corresponding risk tolerance.
However, the bull run of the last few years has been excellent for 401(k) accounts, producing a 50% increase in the average balance over the last five years. Some investors may be saying “If it ain’t broke, don’t fix it.” Too many of those investors are Baby Boomers who can’t handle a significant bear market.
Fidelity studied their 401(k) account holders (approximately 13.5 million participants) and compared their holdings to a “target” fund that automatically re-allocates stock holdings along a “glide path” assuming retirement at age 67. The study found that 18% of plan participants from 50 to 54 years old and 27% of those from 55 to 59 years old have at least a 10% higher holding in stocks than they should, based on their age. The imbalance gets worse the closer one gets to retirement.
Some older investors have 100% of their 401(k) holdings allocated to stock — specifically, 11% of participants in the 50-54 age range and 10% of those aged 55-59.
Most 401(k) plans make it easy for participants to rebalance their accounts, with simple point and click options and suitable descriptions of the available options. However, according to an Aon Hewitt study, only 19% of 401(k) holders rebalanced their accounts in 2014. The Financial Industry Regulatory Authority (FINRA) suggests as a general rule that you review your holdings annually to see if they should be rebalanced.
In fairness, this study only looks at Fidelity holdings and does not consider any accounts at other funds, or other holdings that the 401(k) participant might have. It’s possible that some of the Boomers holding 100% stocks have a pension, a bond fund with a different financial group, or some other lower-risk asset that offsets the riskier stock holdings. However, it’s a safe bet that many of the 100% stock accounts are simply trying to maximize their gains with a flawed understanding of how stocks really work.
If you fall into the inattentive category and either don’t have the time, skill, or interest to rebalance your own funds, consider investing in a target fund that rebalances your portfolio automatically as you age. It is similar to the reference fund Fidelity used for their study. You may be putting your retirement funds into somebody else’s hands with a target fund, but at least somebody is taking responsibility for it.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.
Originally Posted at: http://www.moneytips.com/is-to…..stocks/330
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