If your 401(k) and Roth IRA are the vehicles that will help you save for retirement, then the mutual funds inside them are the engine that drives your retirement savings. Every once in a while, it’s a good idea to take a peek under the hood to make sure the engine is performing as well as it should.
So, how can you get a good handle on how well your retirement accounts are doing? Answering these four questions can help you figure out where you stand. You’ve got to start with the big picture and then drill down to focus on each individual fund to make sure you’re getting the most out of your investments.
Let's dive in!
Question 1: As a group, are my mutual funds keeping up with stock market returns?
Have you ever heard of the term “par for the course”? It’s a golf term that basically means your outcomes are meeting your expectations. When it comes to investing, you should be measuring your investments’ performance against the stock market’s. That’s how you know if you’re doing well or not.
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To do that, take a look at the S&P 500 Index—which measures the performance of the 500 largest, most stable companies in the New York Stock Exchange and is considered the most accurate measure of the stock market as a whole—and measure your investments against that index.
Your goal should be to invest in mutual funds that consistently outperform the stock market, but it's good to know where the benchmark is and how your investments are holding up. And, clearly, if your mutual funds are not keeping up, you need to start digging to find out why.
It’s also important to notice that the question is not whether each individual fund is keeping up with the market. At this point, you’re just looking at the big picture. As a group, your investments should keep up with or outperform the stock market over time.
Question 2: Is my mix of funds off-balance?
If your mutual funds are underperforming, it could be that your fund mix is out of whack. A balanced mix of funds plays a much more important role in the success of your retirement accounts than most investors realize. Our favorite combination is 25% in growth funds, 25% in aggressive growth, 25% in growth and income, and 25% in international.
If your funds get off-balance, and your aggressive growth funds start taking up a larger chunk of this mix, for example, a drop in the stock market will drag down your returns. That’s because each of the four fund types performs differently in different market conditions.
By keeping your mix of funds equal, or close to it, you can take advantage of all types of market conditions and still protect your retirement savings from the ups and downs of stock market investing.
Don't worry—rebalancing your funds is an easy fix. Your investment professional can help you maintain the right balance in your retirement portfolio so that you’re properly diversified.
Question 3: Do I have top-performing funds in my retirement accounts?
Now that you’ve examined your mutual funds as a whole, it’s time to grab a magnifying glass and take a closer look at your individual funds. As you review your funds, keep these things in mind:
- Short-term “top performer” is not the same as long-term average performer. Depending on how the market is behaving, short-term returns can either look impressive or frightening. Don’t get so caught up in what’s happening right now. You’re playing the long game, remember? Stay informed about your funds’ recent performance, but remain focused on their long-term returns.
- “Top performer” means different things to different funds. Remember when we mentioned the four types of mutual funds perform differently in different market conditions? That trait also means you shouldn’t compare fund returns between the different types. For example, even in a growing market, your growth and income funds are not likely to perform as well as your aggressive growth funds. Compare your aggressive growth funds to other aggressive growth funds, your growth and income funds to other growth and income funds, and so on. That way, you’re comparing apples to other apples and not some other type of fruit.
You can use free online mutual fund screeners to compare your funds, and if you have any concerns, talk to your investment pro.
Question 4: Do I need to make any changes to my individual funds to improve performance?
Have you ever been stuck in traffic, got impatient and switched lanes . . . only to come to a grinding halt while the lane you were just in starts to move faster than the one you changed to? That’s what usually happens when you keep switching funds trying to chase higher returns!
As a long-term investor, changing funds should be an extremely rare event. In fact, investors who hold their mutual funds for more than five years should expect their performance to outperform the stock market over the long haul—which is what you’re aiming for.
Jumping from one fund to another to chase high returns will have the opposite effect on your retirement accounts. There is no reliable way to time the market, so choose good funds to start with, and depend on their long-term performance to grow your nest egg.
Having said that, there are occasions where changes in a mutual fund’s leadership or investing philosophy means you have to give it up. Your investing professional can help you make the tough decision to make that change.
Need an Investment Professional?
When your car’s engine starts sputtering, are you going to try to fix it yourself? Or ignore the problem and hope it magically gets better? Of course not! You’d take your car to a mechanic you trust, someone who will be able to figure out what the problem is and help you fix it.
You need to do the same with your investments. That’s why it’s important to have an investment professional in your corner. They can help you answer these four questions and make suggestions to help you get your investments back on track.
Don’t have a pro? The SmartVestor program is an easy way to find qualified investment pros in your area who can help you answer these questions and make any adjustments you need to make to get your investments back on track.