The Average YTD for 401(k) Investors
Saving for retirement is imperative for everyone entering the workforce and everyone currently employed. Socking money away via payroll deduction in 401k or similar qualified employer-sponsored retirement plans is an easy, painless way to slowly grow an account.
Matching employer funds is an additional savings incentive. The hard part is how and where to invest the money. Researching investment choices and monitoring investments on a regular basis increases the chances of accumulating a substantial portfolio.
It is an account holder’s responsibility to choose investments and monitor the portfolio. Most 401k and other plans offer a number of mutual funds from which to choose. Mutual funds, administered by investment companies, combine investors’ money and buy securities. There are mutual funds for a wide variety of securities.
Examples include large cap domestic stocks, small company stocks, large cap global companies, corporate bonds, emerging markets, growth stocks, value stocks and equity income funds. A lot of data is available on mutual funds, including investment philosophy, top holdings, expenses and long-term performance. Evaluating performance on a regular basis ensures the goal of growing an account.
Mutual fund performance is published and updated frequently. A fund’s performance should be available for intervals of 10 years, five years, three years, one year and year to date. Mutual funds with a history over 10 years frequently provide a performance figure since inception, a number covering all the years the mutual fund existed.
Year-to-date performance, summarized as YTD, is quoted on a calendar year basis from Jan. 1 through Dec. 31. For example YTD performance on Jan. 15 would include only two weeks; Nov. 15 would include 10 ½ months of fund performance.
Performance numbers are available on a number of websites, including Morningstar, Yahoo finance and the Motley Fool website. In addition specific performance data on funds held in a 401k should be available on a plan sponsor’s website. Most company retirement plans provide online access for account holders to review their account, make changes and monitor performance.
Comparing Fund Performance
A number alone is meaningless. A negative YTD performance number is no reason to panic and move money. Performance numbers, expressed as a percentage, should be compared to similar funds in a mutual fund’s category.
The economy and the stock market experience volatility, and fund performance will move up and down over the short term. The long-term trend should be upward. A fund performing similar to other funds in its category should not be abandoned. On the other hand if a fund consistently underperforms its category, it is time to look for an investment alternative.
The Wall Street Journal provides mutual fund performance by type. During 2020 most U.S. domestic stock funds underperformed the Standard & Poor’s stock index. Unless a fund performs far below the average, there is no reason to shift money. A retirement account is a long-term investment.
Reviewing a 401k Account
Account holders should review their portfolio every six months. Initial investment choices allocate funds across three basic categories: stocks, bonds and cash. Younger investors are usually more aggressive than older ones, assigning a large percentage of money to stock mutual funds.
As an individual approaches retirement, the allocation becomes more conservative. A portfolio review offers the opportunity to balance an account and reallocate funds if necessary.