This week's panel:

Do high-return funds show market efficiency?

If I've maxed out on my 401(k) contributions, can I still make a Roth IRA contribution?

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Do high-return funds show market efficiency?

from Bee

Q: Mutual funds which have abnormally high returns in a year are successful in attracting abnormally large numbers of new investors in the following year. Is this consistent with capital market efficiency?

A: (Lou) Unfortunately, it is true that often times, the big winners of the current year attract the most money the next year.  However, buying yesterday's big winners almost always brings disappointment because the market frequently changes its stripes. 

Most investors should instead focus on portfolio managers, not mutual funds, that perform well in the market over the long term (ten years or more).  Once a manager changes, the record of that fund is pretty much useless information.  Look for consistent year in and year out performance and compare those funds to their style peers. 

For example:  Look at small cap value funds against other small cap value funds.  Then, buy a fund and don't sell it unless you replace it with another small cap value fund.  Another example of chasing performance is investors jumped out of real estate funds in 1998 and 1999 after losses of approximately twenty percent over two years.  They then jumped into the S & P 500 index funds just in time to incur losses of 9% in 2000 and 13% in 2001.  Real estate funds had total gains of 40% over 2000 & 2001.  

The bottom line is don't get into the performance game.  You'll almost always lose.

If I've maxed out on 401(k) contributions, can I still make a Roth IRA contribution?

from Ernie

Q:  A few basic questions:

1.    Does an employer's matching contributions to the 401(k) program count toward the employee's annual dollar or percentage limit?  If it matters, I am not yet vested.

2.    Assuming I max my 2001 401(k) contributions ($10,500), can I still make a 2001 contribution to a Roth of $2,000?  (Annual compensation is less than $75,000.)

I will max out my 401(k) contributions in 2001 ($10,500) ... can I still make a 2001 contribution to a Roth of $2,000 ... or is the combined max $10,500?

A: (Cathy) An employer's matching 401(k) contributions do not count toward the employee's annual dollar or percentage limit. In 2001, the federal limit on annual contributions was $10,500, gradually increasing to $15,000 in 2006. In 2002, that limit is $11,000.

The Tax Relief Act also offers catch-up provisions for workers 50 and older. Starting in 2002, if you're 50 or more, you may contribute an additional $1,000 above your maximum allowable 401(k) contribution, a catch-up amount that will increase gradually to $5,000 by 2006. For IRA's the catch up limit for 2002 is $500.

Please note that while federal law sets the guidelines for what's permissible in 401(k) plans, your employer may set tighter restrictions.

If you are single and have an adjusted gross income of less than $95,000 you are entitled to a full $3,000 contribution in 2002 to your Roth IRA, regardless of your 401(k) participation status or contribution amount.

For more on catch up contributions, click here http://www.401khelpcenter.com/catch-up_contributions.html

For more on Roth IRA limits: see page 3 of http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf

Hope that helps!

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.