Smart 401K Investing: Choosing The Right Funds For You

Choosing the right type of 401(k) funds to invest in can be tricky, but it's an important part of planning for retirement. Here are some things to consider when deciding how to allocate your 401(k) investments:

- Risk tolerance: How much risk are you comfortable with? If you're approaching retirement, you may want to take on less risk by investing in more conservative funds. On the other hand, if you're younger, you may be able to afford to take on more risk in pursuit of higher returns.

- Diversification: It's generally recommended to diversify your portfolio across different types of investments, such as stocks, bonds, and other assets. This can help minimize risk and maximize returns over the long term.

- Fees: Pay attention to the fees associated with different investment funds. Higher fees don't always mean better returns, so look for funds with strong historical performance and low expense ratios.

- Time horizon: Consider how long you have until retirement. If you have a longer time horizon, you may be able to take on more risk in pursuit of higher returns.

- Employer match: If your employer offers a match for your 401(k) contributions, make sure to take advantage of that as it's essentially free money.

- Tax benefits: Contributions to a traditional 401(k) can reduce your taxable income, while a Roth 401(k) offers tax-free withdrawals in retirement.

- Target-date funds: These funds automatically adjust their asset allocation based on your target retirement date, making them a hands-off option for investors who don't want to actively manage their portfolio.

Conservative funds

• Vanguard Information Technology Index Admiral Shares (VITAX): This passive tech fund has delivered a solid 10-year return of 20.6% by tracking the performance of the S&P 500 and Nasdaq composite indices.
• Calvert Equity Fund (CSIEX): This fund proves that you can do good ethically and financially. It invests in large-cap growth companies that meet Calvert's environmental, social, and governance (ESG) standards. It has delivered a 10-year average return of 13.4%.
• Fidelity Advisor Technology Fund - Class I (FATIX): This fund has a five-star rating from Morningstar and focuses on companies that produce or benefit from technological advances, such as Nvidia, Apple, and Microsoft. It has delivered a 10-year average return of 21.3%.
• Fidelity Select Semiconductors Portfolio (FSELX): This fund has a five-star rating from Morningstar and ranks highly on U.S. News & World Report's best technology funds list. However, conservative investors should approach it with caution due to the cyclical nature of the semiconductor industry. It has delivered a 10-year average return of 27.2%.

When considering conservative funds for your 401(k), it's important to keep in mind that these funds are generally less risky but may also offer lower returns compared to more aggressive options. Additionally, remember to evaluate the fees associated with these funds, as high fees can eat into your investment returns over time.

Value funds

• The Vanguard Equity-Income Fund Investor Shares (VEIPX) focuses on investing in large-cap companies that pay investors above-average dividends.
• The ClearBridge Large Cap Value Fund (SAIFX) is an actively managed value fund that seeks capital appreciation and income through a value-focused investing strategy.
• The Invesco S&P 500 Enhanced Value ETF (SPVU) tracks the performance of the S&P 500 Enhanced Value Index, investing at least 90% of its assets in stocks that are part of this index.
• The iShares Edge MSCI USA Value Factor ETF (VLUE) is an index fund that seeks to replicate the holdings and return of the MSCI USA Enhanced Value Index, which includes US large- and mid-cap stocks with value characteristics.

When considering value funds for your 401(k), it's important to keep in mind that these funds are generally suitable for investors with a long-term investment horizon and those who understand macro trends. Additionally, value funds come with certain risks, including market timing risks, economic factors, and interest rate risks.

Balanced funds

Compared to life-cycle funds, which adjust holdings to lower risk as an investor's retirement date approaches, balanced funds do not materially change their asset mix. They also differ from actively managed funds, which may evolve in response to changing market conditions or an investor's risk appetite.

However, a disadvantage of balanced funds is that the fund, rather than the investor, controls the asset allocation, which might not align with an investor's tax-planning strategy. The characteristic allocation of a balanced fund may also not always suit an investor's financial goals, as needs and preferences can change over time.

Aggressive growth funds

• ClearBridge Aggressive Growth Fund (Ticker: SHRAX): This fund has $5.7 billion in assets and a year-to-date return of -8.7%. It has a beta of 0.68, a Sharpe Ratio of -0.44, and a standard deviation of 14.07, indicating a higher-than-average level of risk. The expense ratio is 1.11%.
• Morgan Stanley Institutional Discovery (MPEGX): This fund is managed by Dennis Lynch and a team of 26. They invest in companies with strong business models and high growth potential, including industry leaders in fields like cloud computing and gaming.
• Vanguard Mid-Cap Growth (VMGRX): This fund is managed by Frontier Capital Management (60%) and Wellington (40%). It focuses on steady growth in the tech and healthcare sectors, with fees of just 35 basis points.
• T. Rowe Price Mid-Cap Growth (RPMGX): This fund is managed by Brian Berghuis, who has a track record of successful investments in companies like Tesla and Netflix. He currently invests in companies like Hologic and Marvell Technology.

It's important to note that aggressive growth funds may not be suitable for all investors, as they carry a higher level of risk compared to more conservative or moderate funds. Investors should carefully consider their financial goals, risk tolerance, and time horizon before investing in these funds. Additionally, it's generally recommended to diversify your investments across different types of funds and asset classes to mitigate risk.

Target-date funds

When choosing a target-date fund, you simply need to select the fund closest to your expected retirement year. For example, if you are 30 and plan to retire at 65, you would choose a 2050 fund. The fund managers will then adjust the mix of stocks and bonds as you progress through your career to help you stay on track.

The main benefit of target-date funds is that they provide access to professional management. The managers conduct research to inform the creation of a "glidepath" strategy that the fund will use to navigate risk for investors as they approach retirement. This helps to ensure that savers are invested in appropriate assets. Target-date funds also offer diversification and strategies to help manage inflation.

However, target-date funds can be relatively expensive in terms of fees. They are funds of funds, meaning you have to pay the expense ratios of the underlying assets as well as the fees of the target-date fund itself. It's important to check the prospectus carefully before making a decision, as target-date funds differ greatly from company to company.

Frequently asked questions