Questions and Responses

How should I realign my portfolio in the current market?

Am I too late for a  401(k) rollover?

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How should I realign my portfolio in the current market?

from John

Q: We have a portfolio of 80% stock funds (well diversified) and 20% bond funds. Now retired and with a need for a monthly income from our investments, we need to realign our portfolio to 70% stock funds and 30% bond funds to start withdrawals. 

With the market down for selling and Mr. Greenspan lowering interest rates, bond prices up, what's a person to do in the short term when we need to make a move. It looks like bond prices are not going to come down for quite awhile?

A: (Paul) I can't be specific regarding your holdings because I don't know the quality of your positions.  I do believe your allocation to equities is too high for your objective.  Perhaps a timely reduction to 50% -65% equities (gradually) would better insulate your portfolio from market volatility.  In addition, your Bond and Cash mix could provide sufficient income to satisfy your Income needs.  

A continuous rebalancing of your portfolio would assure you have adequate commitments to equities to provide growth and offset inflation, and bonds and cash to generate Income.  A rule of thumb, not always recommended, is to have your age in fixed income.  For example: At age 65, you'd have 65% in bonds and the difference in equities.  You'll have to determine your comfort level however.

Should I borrow from my 401(k) to pay off credit card debt?

from Tanya

Q: I have approximately $4,500 in credit card debt and have read that it can be smart to borrow from my 401(k) to pay them off. My current fund balance is around $8,000 (at least it was a week ago). I'm going to be starting law school in the fall and would like to eliminate the debt as soon as possible to save some money for tuition and books. Is borrowing from my 401(k) a good idea?

A: (Paul) I rarely recommend borrowing from one's 401(k) plan.  However, yours could be an exception. I'll assume (big mistake) for our purposes that you've exhausted all other possibilities regarding paying off your high interest credit card debt.  If so, then it could make some sense.  

Will you continue to work while going to law school?  Are you still making contributions to your 401(k) plan?  If so, discontinue contributions and allocate those funds to reducing your debt.  I'd rather see you pay off your credit card debt with current cash flow over a period of 12-18 months.  I'd love to see those retirement funds grow for 30 plus years; however, sometimes emergencies arise. 

Remember you have to pay off your 401(k) loan within 5 years so you aren't avoiding a payment.  If you can't pay this loan off, then you'll be hit with a 10 percent pre-mature distribution penalty and have to claim all unpaid loan balances as ordinary income subject to your ordinary income taxes. Think this through clearly and develop a plan. Good luck. I wish you well and good luck in entering law school.

Am I too late for a 401(k) rollover?

from Billy

Q: I left a job about 3 to 4 years ago, unaware that I had a 401(k) account until I recently received a statement. Is it to late to roll this over into my present employer's account and if so what are my options for this money? It is a small amount, around $2,000.

A: (Greg))  Whether you are able to rollover an old employer's 401(k) into a new employer's 401(k) depends upon whether your current employer's plan allows rollovers. The best way to find this out is to ask your plan administrator. It is more difficult to decide if you should roll into the new 401(k), or into an IRA. 

How many options does your current plan have and how good are they? To diversify, you need to have at least 3 options. My ideal would be an index fund that follows the S&P 500 Stock Index as a core holding and a small company stock and an international fund for good long term growth. If you are cautious, you will want to put a portion- perhaps 15%- in a fixed income investment such as a short term bond fund. If your current employer's 401(k) has meager pickings you may want to consider the universe of options that an IRA can provide.

Also, consider the quality of funds that are in your employer's 401(k). A good measure of this is their performance compared to their peers. You can find this information on any Morningstar report.

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.