Manage your 401(k), 403(b) or TSP investments in 3 Steps

July 9, 2015

Whether you just guess or have a deep understanding of your options in your workplace retirement plan, following these steps will help you make better decisions.

Step 1 – Assess your risk tolerance.  This step is often skipped by individual investors with disastrous results.  Take the time to quantify your risk tolerance to help you be prepared when markets fall.  Use an independent risk tolerance questionnaire and answer the questions thoughtfully.  The right answers are the ones that reflect how you usually feel, not how you think you should feel.

Step 2 – Allocate your assets to match your risk tolerance.  This is the most difficult part of the process and you may want to talk with a professional to help you.  It takes thorough research to avoid the pitfalls associated with constructing a portfolio with limited investment choices.  You need to keep in mind the volatility, and correlations of different options.  Often historical performance figures are distributed as part of the research materials with your plan paperwork.  The legal disclaimer of past results are not indicative of future results is standard to most investment literature because it is true.  Past results should not be relied upon as the most important factor in determining your allocation.

Step 3 – Reassess when things change.  If your feelings about risk change or you have gone through some life changes go back to step 1.  If the funds you invest in change managers, or your investment choices change then go back to step 2.  If your allocation drifts due to investment performance and your portfolio begin to take on too much or too little risk, rebalance your assets to match your appropriate allocation.

You can see more about how to do this in my next article: How to rebalance your workplace retirement plan.

To decide how much of your paycheck you should contribute to your workplace retirement plan talk with an advisor about your specific situation.