Q. My employer provides employees the option of investing in a 403(b) plan. This looks like a wonderful way to save for retirement since taxes are not taken out until after retirement. Most employees have decided to participate in this program, but we are not sure which fund to choose. What are some guidelines we can use in making this decision?
A. The needs for each individual and family are different and depend upon their financial objectives. There are however some universal principles that are helpful:
1. Secure a list of the mutual funds available through your employer that specialize in long-term growth and examine their track records. Such information is readily available online. Examine the rates of return during the past one, three, five and ten years. Past performance will, of course, not guarantee future performance. It will, however, provide a logical base of knowledge upon which to build.
2. Consider carefully the risk factors involved with each fund. The greater the risk, the greater the potential for higher return. The amount of risk you are willing to take will depend upon your temperament and the amount of time over which you plan to invest. Some people are comfortable taking risks while others need the security of a sure thing. A fund that specializes in speculative stocks will fit the former. A fund that invests in secured bonds and treasury notes will be closer for the latter. Time is also part of the question. The person anticipating retirement in 30 years will have greater opportunities to recover from a poor return or loss than someone retiring in just five years.
3. Diversification is an important consideration for any plan. It's smart to place your money in a variety of areas. This way, when one type of investment does poorly, others can compensate for the loss. There are several ways in which this can be done.
You may consider a single fund that invests in a variety of areas. These may include a combination of stocks from giant stable companies (Blue Chip), stocks that have opportunity for quick increase or decrease in value (speculative), company loans (bonds), loans from the US government (treasury notes), property (real estate), local or USA-based companies (domestic), companies outside the USA (foreign), and companies that specialize in a specific industry, such as healthcare, software, or utilities.
You may also choose to place money in several different funds that specialize in one of the areas listed above. This provides the diversification you desire as well as the expertise of several mutual management teams.
4. The variety of fees charged are as diverse as the funds themselves. Some charge a fee when funds are purchased or sold, others have fees that decline the longer you keep your money invested with them, and others, called no-load funds, charge only a yearly maintenance fee. When such fees are compared their past and expected rate of return should be considered.
Detailed information regarding the mutual companies in which you are interested can be found online. Read the information you secure carefully including the prospectus.
Key Takeaways
- Understanding the core concepts is essential for growth
- Consistent application of principles leads to transformation
- Small daily actions compound into significant results
- Mindset shifts are the foundation of lasting change
Moving Forward
The journey of personal growth and transformation is ongoing. Each step you take, no matter how small, contributes to your overall development and success. Remember that progress is not always linear, but persistence and commitment to your goals will ultimately lead you to where you want to be.
I encourage you to take action on what resonates with you from this article. Choose one key insight and implement it into your daily routine. Small, consistent changes often lead to the most profound transformations.