Organizing Your Money – Part 3: Evaluating your 401(k) or IRA

A good habit to get into is to check out your retirement account two or three times per year to evaluate your fund’s performance.  Some geeky investors might think I am in idiot for thinking that checking your retirement account only a few times per year is a good thing.  The reason that I think you should leave your retirement account alone is because I don’t want people to think they can time the market.  Unless you are an expert on the market and you stay up on the countless information about the stock market, you’ll never be able to time it.  In fact, most good financial professionals will tell you that you lose most of your returns when trying to time the market.  If you keep shifting around your money from account to account, then you’ll hurt your investments greatly. 

On the other hand, you don’t want to totally neglect your retirement and investment accounts.  Think of taking an exam.  You want to double check your answers and your work, but if you harp over every answer then you’ll probably change answers that were originally correct.  Here are some things that I do when I look at my 401(k).

1.  I check my overall year-to-date return percentage.  Don’t freak out if your YTD return is not that great.  Mutual funds are designed for investing in the long term.  So if your investments are having a down year, chances are that they will rebound next year.  Make sure you picked funds with great 5 and 10 year track records for rate of return.  If you think you picked too conservatively, then talk to your company’s financial advisor or an investment advisor about your elections. 

2.  Don’t worry about your Yield percentage.  Check out my article on the difference between YTD return and yield.  Yield is all about what companies are paying out with dividends, and if you invest in a lot of high-growth small cap companies, then your yield percentage won’t be high.  Focus more on your mix of stock funds that you invest in.  If you’re young, be more agressive, but throw in a balanced fund and/or an international fund. 

3.  Evaluate the expense ratio of the funds you are invested in.  If your expense ratio on any one fund is over 1%, then you may want to consider a comparable fund with a small expense ratio.  In a 401(k), your options are usually are usually limited.  Make sure you don’t switch from a fund that earns 12% on average to a fund that averages 6% on average just because of the expense ratio.  What I’m saying is that you should always go with the fund that charges less to manage if it measures up in terms of rate of return. 

I am not a financial professional, so please consult your company fund manager or the mutual fund advisors if you have specific questions about your investment elections in your retirement fund.  These are just some things that I have learned to do after managing my 401(k) for the past two years.