This question comes to us from a guy I have known my entire life:
I read your article the other day Should Portfolio Rebalancing Be Considered Market Timing? and it got me thinking about my 401k balance. I’m turning 40 next month and am looking at my 401k balance, thinking should someone with my level of investment knowledge be managing this account?
Over the years, it’s grown to a significant amount without any research on my part, I just deposit money spread it over several funds and watch it grow. Rebalanced the 401k last year using a financial engine software supplied by my company, but as it turns out my market timing was bad. Overall, I think the diversification across 12 mutual funds is good, but still wonder if I could maximize gains or choose better times to rebalance the portfolio.
I’m guessing that most people manage their 401k’s themselves, but should they? Especially once the 401k reaches a higher balance as there’s so much more growth potential. Is there any added value to authorizing a professional to manage your 401k?
Wow! I can’t believe one of my friends is turning 40!!!!!
First off, just because you made changes to your plan and the market went down, does not mean you made a bad choice. Remember, we’re looking long-term here so we really shouldn’t care what happens right now. No, it’s not fun to watch a 401(k) balance drop but we have to look at the big picture.
If you have a relationship with an advisor, they might be willing to take a look at your plan. However, if they are commissioned-based, I wouldn’t expect them to spend a lot of time analyzing your plan and making suggestions since they don’t get paid for that kind of work.
There are lots of fee-only financial planners out there that will offer advice on 401(k)s. You’ll have to pay an hourly fee but it might be worth it if you think you need a second opinion. I will tell you that lots of planners are just going to run your fund choices through Morningstar or something similar to Financial Engines, so you’ll most likely get the same results as you already got when you ran the numbers yourself. A good planner will also help you assess your risk tolerance and educate you on the best asset allocation for you based on your risk tolerance, age, and time horizon. So, there could be some value added there. Just be prepared to spend $150 – $300 for the advice.
I’m not sure it is necessary for you turn over management of your 401(k) to a professional. Asset allocation is pretty cut and dry and can be easily grasped by most people by reading any number of books. I realize that reading a book on asset allocation is probably not at the top of most people’s list of desirable activities but I honestly believe that EVERYONE should have a basic grasp of investing and asset allocation. Fortunately, there are books out there that are very easy to understand and are actually interesting. One of the best books I know of is a short little book called The Coffeehouse Investor (Affiliate Link), which I read in a couple of hours. It will give everyone a basic understanding of asset allocation and investing. EVERYONE should read “The Coffehouse Investor.”
If you want something beyond that, I would suggest taking a look at The Intelligent Asset Allocator (Affiliate Link) by William Bernstein. It’s a little on the dry side but is still a very good book and will definitely give you a better understanding of asset allocation.
So, those are my thoughts on 401(k) management. What do you guys think? Should people hire a professional to manage their 401(k) account? Why or why not?