Picture yourself at a birthday party when you were a kid. A picture of a donkey is hanging on the wall and someone blindfolds you. They spin you in circles until you’re dizzy, hand you the tail of the donkey, now it’s your job to get it as close to the right spot as possible. You’ve played this game and you got closest when one of your friends told you when you were headed the wrong way or caught you when you lost your balance and got you back on track.
Most people make their investment choices when they first contribute to their 401(k) and never look at it again i.e. the blindfold. They want to do well and they do their best to get the “tail” as close as they can yet it’s hard to do when they can’t see what they’re aiming for.
Here’s the difference, you can look and see what you’re aiming for. You don’t have to be blindfolded. You can and should look at the balance of your account at least yearly, preferably quarterly to make sure you’re on track. Why is it important?
When you first started your 401(k) you may have allocated the account, by percentages, between stocks and bonds. Let’s say for example that you allocated 70% to stocks and 30% to bonds, based on your risk tolerance and goals (a.k.a. risk score). Fast forward 10 years. Is your 401(k) still at that target balance of 70% stocks 30% bonds? The chances are nil.
Why wouldn’t it be? How can it become out of balance, YOU haven’t changed a thing? Over time, if stocks outperform bonds the value of the stocks becomes a greater percentage of your portfolio. The increased percentage in stocks can lead to increased risk in your 401(k), which means you are taking on more risk than you originally set out to. Selling the stock increases and reinvesting in bonds or vice versa will bring your 401(K) back to your initial allocation.
The good news is you don’t have to play pin the tail on the donkey with your 401(k) and retirement. However, without that friend helping to guide you when you’re getting off track it’s up to you to keep an eye on things. The question is, are you really able and ready to commit to keeping your eye on the account?
Sitting down with an advisor is an important part of transitioning out of the work force. Our goal is to educate our clients, to learn your goals and partner with you to achieve those goals. We are here to help you navigate retirement. Call for an appointment or use the convenient online form to request information. Idiomatically, the term Pin the tail on the donkey can be used derisively for any assigned activity which is pointless or for which a person has been handicapped (blindfolded), according to Wikipedia. Play pin the tail on the donkey with your kids or grand kids, not your retirement.
The information provided is for educational purposes only and should not be construed as an investment recommendation. All investments involve risk including the potential for loss of principal invested.
Investment Advisory Services offered through Sound Financial Strategies Group, Inc. (“SFSG”), a Registered Investment Adviser. Certain representatives of SFSG are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC, 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866 (800)637-3211. SFSG and APW Capital are separate and unrelated companies.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by APW Capital.
Posted on Mon, March 31, 2014
by Sound Financial Strategies Group