Questions and Responses

Should I wait to tweak my portfolio?

Can an employee use 401(k) money to invest outside of the plan?

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Should I wait to tweak my portfolio?

from Sharon

Q: I recently evaluated all of my funds against comparable funds and I've determined that I need to make some changes based on long term returns.  Unfortunately, like so many others, my current funds are down badly this year. Given the fact that the overall market is down, is there any reason why I should wait to sell my current funds and reinvest in the new funds?  

I expect that the sale of my current funds will result in substantial losses, but my thought process is that when the market recovers, I will be in the funds with better track records.  What do you think?

A: (Rick) Your line of thinking is fine. By selling one fund and buying another, you are creating a tax loss that can be used against future gains and capital gains distributions, ass well as writing off $3000 per year against ordinary income (assuming you account is taxable). In addition, by swapping from one equity fund to another, you are not out of the market. Trying the time the market is not recommended. 

I did lose you on one point. You said "when the market recovers, I will be in the funds with better track records".  Past performance has nothing to do with future results. Chasing mutual fund performance typically results in a lower overall return than staying in one place. If you do move, I recommend using no-load index funds to keep your expenses low and to gain broad market diversification. The place to shop for index funds is Vanguard.  Take a look at the Vanguard Total Stock Market fund for starters.

Should I make changes to my grandchildren's UTMA accounts?

from BC

Q: When my husband passed away in 1997 I became custodian for our grandchildren's accounts. They were invested in MFS Emerging Growth Fund B (MEGBX) and Stein Roe Tax Managed Fund (CTMBX). The children's ages are 9, 6, and 1. (I set up the youngest in the same way the other 2 were). We invested $5,000 for each when they were born. The values are now $7,424, $5,569, and $3,021.

I don't know if I should just let them go as they are or look for something else.

A: (Rick) Your husband's grandchildren are still very young and have plenty of time before they are off to college or trade school. The MFS Emerging Growth Fund B (MEGBX) and Stein Roe Tax Managed Fund (CTMBX) would be considered appropriate investments give a ten year or greater time horizon.

Nevertheless, both funds are going to have their ups and downs, especially the MFS Emerging Growth, which has a hefty weighing in technology stocks.

No one can make any guarantees about the performance of your investments or the stock market going forward. It is impossible to predict. However, history has shown us that investors who have patience and a long time horizon stand a good chance of making money in stock mutual funds. Good luck.

Can an employee use 401(k) money to invest outside of the plan?

from John

Q: My wife is currently participating in her employers 401k plan and is very satisfied with the funds she has chosen for prudent conservative growth. Now her employer has notified the employees that beginning in April they will no longer have these same funds in the plan. Instead, they will have to switch into new funds managed by a large banking system. Our analysis of the new funds from several reputable sources indicate that the new funds to be presented do not fit her needs.

Is there any way short of quitting her employment with this company to take money out of the current 401k plan and invest it elsewhere in the market place?

A: (Lou)  Perhaps. First determine if your wife's employer has a self-directed investment option (where she can open a brokerage account and open up her investment options to a wider array of mutual funds). Many large employers have this option but don't necessarily publicize it .

The second option is to find out if her company allows in-service distributions via an IRA rollover account. If so she will be able to rollover at least part of her money. I would advise establishing the IRA rollover at a discount brokerage company which has a much wider array of investment options. 

If these options are not available to you, consider selecting the best options available. What you'll find out is over a ten year period particularly for big cap domestic funds is that they'll perform approximately the same as the S&P 500 plus or minus two percent. In summary, even in the long run bad performing funds probably won't perform too differently than their respective index.

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.