How to Pick 401(K) funds

In a recession market it is painful to watch your retirement nest egg(such as 401k) shrink in value. The conventional wisdom is to stay the course of the market (bull or bear) by sticking to the intended long term investment allocation and rebalancing at periodic intervals. It is often easier said than done. From a psychological perspective, most individual investors tend to tune out after about 20% market correction. Seeing month after month of blood bath is no fun, so ignorance can be blissful. Unfortunately, not paying attention to asset allocation can be painful, in both bull and bear markets. Below is a simple set of strategies that you can follow to keep it sane

Things You'll Need

• 401K account

Instructions

1. Most 401k retirement plans offer limited set of funds to invest in. Often the categories are as follows: Large Cap, Medium Cap, Small Cap, International, Fixed Income/Bond, Money-Market, pre-defined blended life-span investment and sometimes the sponsoring company stock. Within these categories, often there will be choices for growth vs. value, tracking respective indexes etc.

2. Large cap tends to wither economic down turns better than small cap, due to the capital structure and market presence. Small cap on the other hand offers bigger return when the going is good. Mid cap, as the name suggests, blends the risk to reward between these two categories. International/emerging market exposure gives you the much needed diversification in this global economy. Bond/cash exposure gives you stability. Your company stock gives you the option to capitalize on your insights into performance.

3. There are plenty of conventional age-based approaches to picking category allocation. Let's explore a relatively easy way to stay on top of market condition while maintaining reasonable eye towards the long term strategy.

4. First, every quarter review your 401k funds performance by looking at the average annual return and cumulative 3 months/year-to-date return. This will give you a pretty good picture of which funds are doing better than their peers, in respective category.

5. Second, adjust your asset allocation between different categories. This is largely based on the risk-to-reward that you are comfortable with. That said, the earlier step would give you a reasonable idea of how a given category is performing.

6. So essentially if you spend 15mins following the rebalance technique above, you can have the peace of mind knowing that you are managing your retirement account as best as you can, without getting overwhelmed in the process

Tips & Warnings

• Often the 401k funds that your plan offers tend to be private-closed funds with no publicly available tracking symbol. Most of the time if you look up the name you will find a publicly trading peer from the same company, this can offer you close approximation to your fund (with minor variation in expense ratio and such).

• You can also follow major indexes, $RUT (Russell 2000 small cap), $MID (mid cap), $SPX(SP500), $COMPQ (Nasdaq), and symbol EFA (or similar) to compare you foreign funds.