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Whether you’re investing in your 401(k) or Roth IRA, your mutual funds are the engine that drives your retirement savings. Every once in a while, it’s a good idea to take a peek under the hood to make sure the engine is performing as well as it should.
You can get a good handle on how well your retirement accounts are doing by answering four questions. Start with the big picture and then drill down to focus on each individual fund.
Question 1: As a group, are my mutual funds keeping up with stock market returns?
It’s important to notice that the question is not whether each individual fund is keeping up with the market. At this point, we’re just looking at the big picture. As a group, your investments should keep up with or outperform the stock market over time.
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If your gains are at least as good as the stock market’s, you’re in good shape. But, it’s still a good idea to continue with your evaluation to make sure things are going well for all the right reasons. And, clearly, if your mutual funds are not keeping up, you need to start digging to find out why.
Question 2: Is my mix of funds off balance?
If your mutual funds are underperforming, it could be that your fund mix is out of whack. A balanced mix of funds plays a much more important role in the success of your retirement accounts than most investors realize. Our favorite combination is 25% in growth funds, 25% in aggressive growth, 25% in growth and income, and 25% in international.
If your funds get off-balance, and your aggressive growth funds start taking up a larger chunk of this mix, for example, a drop in the stock market will drag down your returns. That’s because each of the four fund types performs differently in different market conditions.
By keeping your mix of funds equal, or close to it, you can take advantage of all types of market conditions and still protect your retirement from the ups and downs of stock market investing.
Rebalancing your funds is an easy fix. Your investing professional can help you sell off some of your overachieving funds and buy more of the lower performers. It feels odd to replace funds that are making money with funds that aren’t doing as well, but it’s a step you have to take to maintain balance in your retirement account.
Question 3: Do I have top-performing funds in my retirement accounts?
Now that you’ve examined your mutual funds as a whole, it’s time to take a closer look at your individual funds. As you review your funds, keep these things in mind:
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- Short-term “top performer” is not the same as long-term average performer. Depending on how the market is behaving, short-term returns can look impressive or frightening. Stay informed about your funds’ recent performance, but remain focused on their long-term returns.
- “Top performer” means different things to different funds. Remember when we said the four mutual funds types perform differently in different market conditions? That trait also means you should not compare fund returns between the different types. For example, even in a growing market, your growth and income funds are not likely to perform as well as your aggressive growth funds. Compare your aggressive growth funds to other aggressive growth funds, your growth and income funds to other growth and income funds, and so on.
You can use free online mutual fund screeners to compare your funds, and if you have any concerns, you can talk to your investing pro.
Question 4: Do I need to make any changes to my individual funds to improve performance?
As a long-term investor, changing funds should be an extremely rare event. In fact, investors who hold their mutual funds for more than five years can expect their performance to keep up with the stock market—exactly what you’re aiming for.
Jumping from one fund to another to chase high returns will have the opposite effect on your retirement accounts. There is no reliable way to time the market, so choose good funds to start with, and depend on their long-term performance to grow your nest egg.
Having said that, there are occasions where changes in a mutual fund's leadership or investing philosophy means you have to give it up. Your investing professional will have the inside track on that info and can help you make the tough decision to make that change.
Bonus Question: Where can I find an investing professional?
Excellent question! And we can help you with the answer. Find an investing professional in your area today!