Currently, half of America is considered invested. This means that they own some sort of equity (stock) or fixed income (bond) type of investment. This number includes folks who participate in their own self-directed retirement plans as well as investors who invest to grow their money outside of these plans.
It is no mean feat to get folks to invest in their future. Just ask any poor soul placed in charge of employee enrollment in a company's defined contribution plan or, as they are commonly known, the 401(k). Of the largest companies in the country, the ones with the highest likelihood of having a self-directed retirement plan, only 70% of their employees use the 401(k) plans. The numbers get even worse as you look at smaller companies. The number of people who take advantage of a 401(k) or some other type of self-directed savings falls to a pitiful 16% enrollment.
The reasons all seem to boil down to the same set of answers to why. "I haven't gotten around to it" or "I need to pay the bills first" or "I can't afford to" to "the company doesn't match". In other words, there is no good answer why they don't. But I have a good idea.
Once they do decide to march themselves into their personnel or human resource department and join, a whole new set of additional problems arise and this is where many of the newly enrolled stop cold. The vast array of offerings is often staggering for even the seasoned investor. The difference is, the seasoned investor is prepared to shuffle through the paperwork and read the material provided with some sort of grasp of the information being offered. It doesn't however guarantee they will make the right choice.
The seasoned investor will look at a prospectus for certain things the newly enrolled plan member will find reads like so much gibberish. 401(k) plans primarily direct their participants to mutual funds, an investment vehicle that provides the investor with participation in the markets with investors of similar disposition who need a professional money manager to manage their money wisely. To their credit, mutual fund companies have done a better job with explaining what they are doing and why. Even more importantly, they are explaining the fees much better.
The fund manager should be concerned with a number of things in order to achieve what their participants want. Investors might find only a sampling of funds to choose from or worse, so many, they are staggered by the choices. Inside a 401(k) plan, the selection is often limited to the funds one family offers and sometimes it is not the full family of funds the company might manage.
Too many choices or too few, it still means little or nothing to the investor or the new investor if they are unable to put what they know into practice.
For the new investor, an auto-pilot approach seems the best answer to the solution. For the seasoned investor, auto-pilot does not provide, at least in their eyes, enough.
Faced with the decision on where to put their money once they enroll, the new investor ought to keep just two things in mind for the first year. Decide on the right amount they wish to invest each pay period and the second, what allocation or lifestyle fund best matches their age.
Regular and even contribution is key to the success of the investment. The act of dollar cost averaging has never been debunked the way so many other formulas designed to give investor a window on the world of investing that only they will be able to see through have. Growing your retirement nest egg by contributing money, the same amount each and every month, will not only provide you with the best advantage to every market condition, but will also allow you to transition seamlessly from the world of the un-invested, the unprepared for their future to the world of the involved. A 401(k) plan allows you to do this before taxes are taken out, deferring the tax bill until retirement when your bracket may be more favorable than your current one.
The key to dollar cost averaging is consistency. Regular investing hits the markets at all sorts of levels, taking the psychological and emotional strain from the act of investing. Those "strains" are very real. It wants to make you want to buy in with the crowd as the markets rise and makes you want to sell as the markets descend. (This crowd emotion is very well documented and the most recent case that comes to mind occurred in January of 2000.)
Removing this emotion allows the investor to buy more shares when they are less expensive and less when they are too expensive and in doing so, it averages the investment money across a broad range of market highs and lows.
The second and no less important thing a new investor can do is picking of a single allocation fund.
An allocation or lifestyle fund basically does the adjustments necessary to keep your investment at the right level of diversity. Diversity is the balance between stocks and bonds that provides the investor, new and seasoned, with protection when the "crowd" overreacts and send the markets gyrating madly in one direction or another.
For the seasoned investor, someone who has an understanding that the 401(k), now celebrating its 25th birthday this year, is the most important part of their retirement planning, allocation funds may, in their opinion be the not best tool available. These investors believe they can actively manage the diversity allocation funds provide by evenly spreading their investments across the world of large cap, mid cap,small cap and international funds. They probably understand their tolerance for risk and how their age plays a part in their ultimate goals.
The new investor however has little knowledge going in but wants to be as equally well exposed with the least amount of effort. With this "path of least resistance" needed to encourage new investors, two-thirds of the companies that manage 401(k) plans for companies now include these kind of lifestyle or asset allocation type offerings.
These types of funds seek to blend conservative, moderate and aggressive investment strategies and make them age appropriate. For the youngest investors, the fund would be tipped heavily towards risk. That risk might involve a heavier investment in stocks and those stocks might be ones that are aimed at growth rather than older companies whose growth has slowed.
The idea behind adopting more risk when you are young is the length of time the investor will be involved in the market. Simply put, they have time on their side. In a down market, they can ride out a longer low waiting for the next new high. Older investors, on the flip side, have a shorter time horizon.
A lifestyle fund caters to age. For the older investor, these funds might have a slightly larger portion of the investor's money in a more stable investment such as bonds. As the investor approaches middle age, the length of time they have to "ride out" those market lows - and there will be lows - is much smaller than their youthful counterparts. A lifestyle fund will automatically change how the money is allocated across stocks and bonds. This is called rebalancing.
The late Ben Graham, author of the "Intelligent Investor", was firm in his belief that all investors should hold an asset mix of 75-25, percentages of stocks to bonds. Those percentages change as an investor ages, but at all times, no matter how young or old they were, they owned some bonds and stocks. Younger investors held 25% in bonds and 75% in stocks. As the investor neared retirement, the percentages reversed.
So simply, an investor need only look at their age to determine which fund is right for them. Perhaps, and for the sake of space, we'll agree with the above statement. The younger you are, the more aggressive the portfolio needs to be.
This group will find 70% of their allocation fund invested in stocks. Moderate investors, a nice way of saying middle aged investors, is offered a fund that invests in a somewhat more evenly balance between stocks and bonds. The conservative investor comes a little closer to Graham's ideal balance with almost 70% of the holdings directed in fixed income securities rather than stocks.
If the new investor uses a fund that is agreeable with their age, they may actually find themselves doing better than the investor who claims to be more knowledgeable.
This was uncovered during a recent study published by Hewitt Associates. The employee benefits research firm discovered that not only do far too few people readjust their portfolios to keep their balanced portfolio balanced, but those that did still underperformed, if only slightly, those that used a fund that automatically allocated the balance.
Lifestyle or asset allocation funds are not only for the new investor. They are also worth a look for the investor that brings a little more knowledge to the table. Key to any plans success remains simple. Invest frequently, evenly, and diversify.
