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Is It Time to Re-Think Your 401k Allocation?

Have you thought much about your 401k lately? If not, that may be a good thing, especially given all the market volatility we’ve seen for the past four or five quarters. And as it turns out, one of the great features of the 401k is its design – you can set it up, forget about it, and let the markets do what they always do.  

But what about the investments within your 401k? If you’ve got 20 years or more until retirement, you may have just dialed it up for growth, and with each pay period, you spread your new contributions across the allocation of your existing funds. And generally speaking, that’s okay. Many, if not most, people do exactly that. 

But if you’re a lot closer to retirement, say, just 5 years away, it’s probably time to look again at your allocation. If you’re still 100% growth with just five or fewer years left, you’re probably taking on more risk than you should. Reducing your exposure to stocks as you approach retirement, as a kind of hedge against the market going down when you’ll need some of that money, makes good sense. 

So maybe, to counteract any volatility, you decide to go from 100% pure growth to a more balanced portfolio with some of your 401k money, or perhaps into a stable value fund as retirement gets even closer. Now, hypothetically, at 60 years old, you’re 20%- 30% in stable value, maybe 35 or 40% balanced, and the rest in pure growth, because that’s what your strategy calls for. Just making these numbers up. 

But here’s where the problem comes in: while your overall asset allocation changed, should your contribution allocation also change? If you keep them the same, that new money you’re putting in each pay period is now going evenly across your new allocation: 25% into stable value, 40% balanced, and the rest into growth in this made-up example. This is where people may be making a big mistake.  We’re not gaining any advantage by doing it this way. 

Why is this wrong? We know the markets will have volatility – that’s just a given. We know there will be up and down days. So where should the new money go? Where will it give us the biggest potential bang for the buck? In the less volatile area? The one that’s earning 3, 4, 5 percent with no real volatility, and no ability to dollar-cost average? No! The advantage is more likely to come on the pure growth side, the volatile area, the one that’s going to be up and down on any given day, week, month, or year – but over the next 10 or 15 years, could potentially do very well. 

The growth section of your 401(k) is the one that you won’t touch for a decade or more. The more stable side will be the money that you’ll access over the next 5-7 years. These are the funds you’ve set aside to cover your cash distribution needs in the not-too distant future, money that will sit there just in case the market drops. It’s there so you can still get to it even after a market drop. It’s there to buy you time so you can continue funding the growth-oriented assets to take advantage of dollar cost averaging into the volatility of the market. 

The set-it-and-forget-it nature of the 401(k) is a great way to get people to save, but it can also come back and bite you if you’re not paying attention when you’re getting close to retirement. Right now could be a really good time for your Lucia Capital Group advisor to take a look at your situation to see if your allocation is lined up with your goals.   

How can we help you the most? Just schedule an appointment! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

No client or prospective client should assume that this information, or any component thereof, serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

Stable value funds can be viewed as an alternative to money market funds; however, there are important differences, and stable value products can be complicated. Unlike money market funds, stable value funds are typically not registered with the SEC. In addition, they are not guaranteed by the U.S. government.

Before investing, carefully consider a stable value fund’s investment objectives, risks, charges, and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call your financial advisor. Read the prospectus carefully before investing.

Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

A dollar cost averaging strategy does not guarantee a profit or protection from loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low-price levels.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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