24 Jan How do I choose investments for my 401(k) and IRA?
Q. It’s the start of a new year and I want to review my investments, which are all in my 401(k) and an IRA. When I look at asset allocation, should I consider the accounts separately or altogether? My 401(k) has fewer investment choices but basically one in every asset class.
A. We’re glad to hear you’re saving.
And you’re correct. The start of a new year is a great time to review your investment strategy.
You should start by taking a risk tolerance questionnaire, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.
It will help you determine how much risk you’re willing to take to achieve your goals and the timeline for when you will need the money, she said.
“If you have a long time until retirement, it is advisable to take on more risk or equities in your portfolio,” she said. “Particularly now, when inflation is high; averaging around 7% in December, you need the lift that equities provide to exceed that figure and provide some growth for your future.”
Next, you should create an asset allocation model that will more likely achieve the desired rate of return.
She said you should look more holistically at your portfolio.
“You may have overlap in the funds, which gives you either more risk than you intended or overlap of managers and/or companies giving duplication in the portfolio,” she said.
Conventional wisdom recommends that you not hold more than 10% of any company stock, especially if you work at that company, she said.
“Your human capital — your job — and your investments are both linked to that company. You are too closely tied to its success or failure.”
D’Agostini said unforeseen events can occur, hurting you if the downturn occurs in the first few years of retirement.
“Diversification can bring down risk and provide more reliability about the returns,” she said.
So yes, when you consider your overall allocation, consider your 401(k), your IRA and any other investments as part of a larger pool.
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This story was originally published on Jan. 24, 2022.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.