Are You Still on Track Toward Your Goals?
When the clock struck midnight on Dec. 31, 2009, California educators and 403(b) and 457 plan investors everywhere breathed a sigh of relief as a tumultuous decade came to a close. Over the past 10 years, two market crashes, a slew of natural disasters (Hurricane Katrina, the Asian tsunami) and man-made ones (9/11, Enron) combined to create what Time magazine termed the Decade from Hell.
As we embark on a new decade, however, many signs point to a gradual economic recovery. Now is not the time to sit back and hope for the best. Rather, after years of sporadic returns, it's a prime time to review your 403(b) and/or 457 portfolio to ensure it still reflects your goals, risk tolerance and time horizon. Assessing the current condition of your portfolio may also help you take full advantage of any market rebounds. Use the How Much Can I Save? calculator to see the savings you can expect to build in your retirement plan based on your current situation.
Step One: Check Your Asset Allocation
Last year's market was particularly turbulent, which threw many retirement plan asset allocations out of whack. It may be time to rebalance. Asset allocation is how your portfolio is divided among the three major investment categories (stocks, bonds and cash equivalents). Even if your personal circumstances, goals, risk tolerance and timeline remain the same as when you chose your asset allocation, the market's recent performance may have changed the value of various assets within your portfolio.
For example, if the stock portion of your portfolio tanked last year, your holdings may be more heavily weighted toward bonds or cash equivalents than you originally intended. To rebalance, you may want to sell some of the bond portion and reinvest the money in equities. A financial advisor may be able to help you make the best decision based on your desired financial goals.
Step Two: Keep Costs Down
Some mutual funds and annuities have responded to declining assets by hiking their expense ratios. Have yours? The charges you pay to buy or sell shares, as well as the operating expenses, can have an impact on your rate of return. An increase of even a point or two can add up over time. For example, $15,000 invested with an 8% return before fees and annual operating expenses of 1.5% would grow to about $72,415 after 20 years.* If that same investment had expenses of only 0.5%, your ending balance would be significantly higher – $91,475.
Learn more about fees in “How Fees Affect Your Return." Review your funds' and annuities’ prospectuses carefully to detect any fee changes and determine whether you should search for a lower-cost fund.
Step Three: Review Long-Term Performance
It's easy to get distracted by the recent chaotic performance of some stock funds, but those returns can be misleading. While past performance is no indication of future results, looking at a fund's long-term performance shows how it has fared in different market environments – and may offer clues to impending returns. Reviewing your portfolio annually can help ensure you stay on track toward your goals.
In addition, using a systematic investing approach such as dollar-cost averaging – where you continue to invest the same amount regularly regardless of market cycles – can help you take advantage of downturns in the market.** Individuals who continued systematic contributions through their 403(b) or 457 during the market downturn were able to buy more shares when prices were low, thus benefiting even more when stock prices rebounded in 2009.**
* Return shown is for illustration only. Your results will vary.
** Systematic investing cannot guarantee a profit or protect against loss in a declining market.
Long-Term Performance of Various Asset Classes
|Large-company stocks ||Small-company stocks ||Intermediate Government bonds ||U.S. Treasury bills |
|9.8% ||11.9% ||5.3% ||3.7% |
Average annualized performance for the period from the beginning of 1926 through the end of 2009. Source: 2009 Ibbotson® Stocks, Bonds, Bills, and Inflation® SBBI Market Report December 2009. Past performance is not an indication of future results.