Mutual Fund Investment Strategies For Your 401(K) Plan

When it comes to investing your money, there are a lot of options to choose from. One option is to invest in mutual funds as part of your 401(k) retirement plan. Mutual funds are a type of investment that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Here are some things to consider when deciding which mutual fund to invest in as part of your 401(k) plan:

- Risk tolerance: It's important to understand your risk tolerance, or how much risk you're comfortable taking on. Mutual funds can range from conservative to aggressive, so choosing one that aligns with your risk tolerance is crucial.

- Fees: Mutual funds typically charge fees, known as expense ratios, which can eat into your investment returns. Look for funds with low expense ratios to maximize your returns.

- Diversification: Diversifying your investments across different types of assets and industries can help reduce risk. Consider choosing mutual funds that invest in a variety of stocks or bonds, rather than putting all your money in one type of investment.

- Performance: Look at the historical performance of the mutual fund to get a sense of how it has performed over time. While past performance doesn't guarantee future results, it can give you an idea of the fund's potential.

- Fund ratings: Research the ratings of the mutual fund from reputable sources to get an idea of its quality and performance. This can help you make a more informed decision about whether to invest in it.

Conservative funds

• American Funds Tax-Aware Conservative Growth and Income Portfolio (TAIFX): This fund offers a mix of growth and income, with a portion of its returns being exempt from federal income tax. It has a Morningstar gold star rating and has consistently outperformed its category average.
• Schwab Balanced Fund (SWOBX): This fund offers exposure to U.S. and international stocks, as well as U.S. fixed-income assets. It has no minimum investment requirement and has outperformed its Morningstar category average over multiple periods.
• Vanguard Wellington Fund (VWELX): As the oldest balanced mutual fund in the market, this fund typically allocates up to 70% of its portfolio to stocks and the remainder to bonds. It focuses on high-quality, large-cap companies with a history of consistent dividend growth.
• Dodge and Cox Income Fund (DODIX): This actively managed bond fund has a gold star rating from Morningstar. It invests in a diverse range of investment-grade government, agency, corporate, and municipal bonds.
• T. Rowe Price Dividend Growth Fund (PRDGX): This fund takes a conservative approach to dividend investing, seeking out companies with strong performance and low price volatility. It has a Morningstar gold-star rating and has delivered strong average annual total returns over the past 10 and 15 years.

When choosing a conservative fund for your 401(k), it is important to consider your risk tolerance, age, and investment goals. Remember to diversify your investments and avoid funds with high fees to maximize your returns.

Value funds

Nearly every large fund family offers a value fund, which can be broken down into different categories, such as small-, mid-, and large-cap value funds.

Some examples of value funds include:

• The Vanguard Equity-Income Fund Investor Shares (VEIPX)
• The ClearBridge Large Cap Value Fund (SAIFX)
• The Invesco S&P 500 Enhanced Value ETF (SPVU)
• The iShares Edge MSCI USA Value Factor ETF (VLUE)

However, it is important to note that over the last decade, most value funds have underperformed both the S&P 500 and growth funds. Therefore, investors should be mindful of the recent history and understand the holdings of the value fund they are considering.

Balanced funds

During the 2022 market turmoil, when both stocks and bonds lost value, investors in balanced funds still fared better than those investing solely in stocks. Over the long term, balanced funds have delivered solid returns while reducing risk, making them a "Goldilocks-like" solution for investors.

While most balanced funds stick to the 60/40 split, they can vary in their approach. Some funds may venture outside the US, investing in international stocks and bonds, while others may use passive or active management funds, or a blend of both. Sustainability-focused investors can also find tailored offerings in this category.

• Vanguard Balanced Index Inv
• T. Rowe Price Balanced
• BlackRock Global Allocation
• Vanguard Wellington
• T. Rowe Price Spectrum Moderate Allc I
• JPMorgan Global Allocation R6

When considering a balanced fund, it's important to assess your risk tolerance, investment horizon, and financial goals. While these funds provide a more stable option than aggressive growth funds, they still carry drawdown risk, as seen during the global financial crisis. Therefore, Morningstar suggests that investors in balanced funds should be prepared to hold their investments for six to ten years.

Aggressive growth funds

When considering aggressive growth funds for your 401(k), it is important to keep in mind that these funds can be volatile, and their performance may fluctuate significantly. These funds typically carry higher risk and aim to deliver superior capital gains. While they offer high return potential, they also come with high risks. It is crucial for investors to carefully evaluate the risk metrics of these funds, such as beta, Sharpe Ratio, and standard deviation, to make informed decisions.

• Morgan Stanley Institutional Discovery (MPEGX): This fund is managed by Dennis Lynch and a team of 26, and they invest in companies with strong business models and high growth potential. They are not averse to industry concentration or high valuations. The top holdings include names like Cloudflare, Roblox, and Snowflake, indicating the fund's aggressive nature. However, it is important to align with the management's long-term focus as the downside risk is significant.
• Vanguard Mid-Cap Growth (VMGRX): This fund offers exposure to fast-growing companies at a low cost. It is jointly managed by Frontier Capital Management (60%) and Wellington (40%). While they seek growth, they prefer steady growers and are not as aggressive as some other funds. More than half of the portfolio is invested in the technology and healthcare sectors, and the fund has a low expense ratio of 0.35%.
• T. Rowe Price Mid-Cap Growth (RPMGX): This fund is managed by Brian Berghuis, who has a successful track record of investing in companies like Tesla and Netflix. Currently, he is betting on companies such as Hologic and Marvell Technology. The fund has consistently outperformed its mid-growth benchmark, and Morningstar gives it high ratings for Process, People, and Parent.
• ClearBridge Aggressive Growth Fund (SHRAX): With $5.7 billion in assets as of March 2022, this fund had a year-to-date return of -8.7%, slightly outperforming its benchmark, the Russell 3000 Growth Index. 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 active management style results in an expense ratio of 1.11%.

It is important to note that aggressive growth funds may not always be the best choice for your 401(k), especially if you are risk-averse or nearing retirement. These funds tend to perform well in rising markets but may underperform during downturns. Therefore, it is crucial to carefully consider your investment goals, risk tolerance, and time horizon before investing in aggressive growth funds.

Target-date funds

These funds are a good option for those who want a hands-off approach to retirement savings. They are managed by professionals and provide a diversified mix of stocks, bonds, and other investments. The funds take more investment risks when the investor is young and gradually become more conservative as they near retirement.

For example, if you are 30 years old and plan to retire at 65, you might choose a target-date fund with a target date of 2065. As you get closer to retirement, the fund's portfolio manager will rebalance and adjust the investments to make them more conservative.

Frequently asked questions