When properly taken advantage of, 401(k) accounts provide employees excellent opportunities to prepare for retirement. But if not used wisely, many people will end up at retirement woefully unprepared.
Studies show that employees find 401(k) investment choices challenging. Many investors do not understand the basic investment principles necessary to make wise choices.
Let’s review several “truths” when it comes to 401(k) investing:
Investing is uncertain and unpredictable.
Selecting 401(k) investments can feel like volunteering for combat.
Most investors do not understand where investment performance comes from.
Most investors focus on short-term volatility rather than long term results.
A now-famous study (called the Brinson Study) analyzed some of the largest pension plans in America to determine what influenced successful investment returns. What was discovered was fascinating.
The 3 primary factors influencing the overall, long-term performance were:
- Market timing
- Security selection, and
- Portfolio design (or investment allocation)
What surprised many was that market timing and security selection did little to contribute to successful investment returns. Over 90% of the long-term investment results were determined by the allocation of investments into stocks, bonds, and cash. Unfortunately, when employees focus on the short-term market volatility, they tend to seek relief through market timing and security selection, hurting their long-term investment returns.
Make sure to place the emphasis on what really works: portfolio design, not market timing or security selection.
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.