LOOK AT YOUR TOTAL INVESTMENT PORTFOLIO AGAIN
The final step in making the most of your investment options is allocating appropriately so that your total portfolio breaks down by asset class the way you want it, and your equity investments are allocated by industry sectors according to your investment style. You don’t have to allocate equally to the two or three or four funds you choose. For example, if there is an aggressive growth fund that you want to experiment with, but you are hesitant about being too aggressive, allocate only 5 or 10% to that fund. If your gut feeling about the market and the economy is very negative now, allocate everything to a money market fund—for now.

REVISIT YOUR 401(K) CHOICES
Make a point of revisiting your 401(k) plan choices on a regular basis. Quarterly or every two months go through the process above. You will find that, even if you haven’t changed your opinion or investment criteria, your allocation may have changed due to fluctuations in the market, and because you and/or your firm have been adding more funds to your plan. You may also find by looking at current data for each fund that something at the fund has changed, perhaps making it no longer an attractive choice. Sometimes plans add new options to choose from. You will need to examine each new option as you have the others. Changes in your life or your outlook about the market may also require investment changes. Make adjustments.

MAKING THE BEST CHOICES
After you have learned what you need to know about each fund offering in your plan, and you have an idea what asset allocation is appropriate for you, you can choose investments that compliment your entire portfolio or are your entire portfolio.

If you think you would like to include some bonds (fixed income) in your portfolio, but you’re not sure what asset allocation is suitable for you, the Allocation Profile can give you some guidelines.

Comments on Fixed Income and Bond Funds - At the time of this writing interest rates are so low that fixed income products have very low yields. Bond funds can actually have negative returns, since fund managers will at times make sales of bonds for losses, either because they need the proceeds to buy a better bond or because they need to raise cash for shareholder redemptions. In general I am not a fan of bond funds. When possible, it is preferable to buy a good bond and hold it to maturity. If the 401(k) is your only investment, there may be one bond fund that is clearly better than the others.

If you determine that the best mutual fund in your 401(k) is a hybrid fund (see Glossary of the Mutual Fund Tutorial for this and other terms), this one fund may be all you need. How does its asset allocation compare with your ideal allocation profile? If it has more in fixed income than you want, you can supplement your equity portfolio by also choosing an equity fund—the one you found most suitable or appealing to your investment style. If it is light in its fixed income allocation, you can also choose to invest in the money market fund to bring up the fixed income portion of your portfolio.

Choosing Equity Funds – If you cannot find an equity fund in your plan that appeals to you, look for an S&P 500 Index Fund, which most plans offer. It is the market benchmark, invested in the 500 largest companies. If you want to be invested in the market, an S&P 500 Index Fund is a diversified, sensible choice. If you are negative on or nervous about the market in general, you should not choose any equity funds.

If you find several from your list of options that sound reasonable and appropriate, based on what you have learned about them so far, perhaps you need to establish your basic criteria in order to narrow down your number of choices to the best two or three. Owning more than two or three mutual funds does not necessarily mean you are more diversified and therefore safer. In fact, examination of each fund’s top 25 holdings will often reveal a great deal of duplication. So, based on the criteria that are most important to you, narrow down your choices to the best two or three funds.

ANALYZING A MUTUAL FUND
Your 401(k) plan is most likely comprised of a list of mutual funds. Accompanying each fund name is probably some information regarding their past performance and some designation regarding how aggressive or conservative the fund is. You need more information to make appropriate investment choices.

What You Need to Know about a Fund – You should know the following about the fund:

• its expenses and fees
• its strategy and the manager
• its asset allocation
• its sector allocation

Use Morningstar.com as your Data Source – You can use other online resources, but Morningstar is free and probably the best and easiest for getting the lowdown on mutual funds. Go to their web site, click on Funds, and type in the mutual fund ticker symbol (five letters ending in X) for the fund you want to analyze. (If you don’t know the ticker, you will have to find it by typing in the name of the fund or the fund family, such as TIAA-CREF, MFS, Dreyfus, Janus, Oppenheimer. This will bring up that fund or a list of all the mutual funds for that fund family.

Using the ticker symbol, pull up the data on each fund. From Morningstar’s snapshot of the fund you can read about the fund manager’s strategy and what kinds of investments he or she buys for the fund and why. It will identify its strategy in “Morningstar Category”. Asset Allocation, Sector Breakdown, and the Expense Ratio will all be on this page.

Interpreting the Data – The expense ratio is the easiest to evaluate. This measurement of management’s efficiency in running the fund is best when under 1%. The higher the number, the more it cuts into the fund’s profits.

The strategy of the fund should roughly fit in with your own investing nature. If you are a conservative person, who would have trouble sleeping at night if the value of your aggressive investment choices were fluctuating wildly, you will want to avoid aggressive funds. For examples and descriptions of fund strategies and styles, go to Fund Strategies and Objectives in the Mutual Fund Tutorial.

It is not always easy to know much about the manager, but Morningstar gives their opinion about his/her success, and most sources will give their resumes so you know how long they’ve been with the fund or with other funds.

The asset and sector allocations are most important with respect to how they compliment your entire portfolio. For example, if your only other investment is a treasury bond, you probably wouldn’t choose a bond fund for your 401(k), but rather a stock fund to diversify your asset allocation. Likewise, with sector allocation: if you work for a retail company and have company stock options and no other investments, you would probably want to choose a fund that is not overweight in retail stocks. More details on Asset and Sector Allocation can be read in the Mutual Fund Tutorial.

HOW TO MAKE THE MOST OF YOUR 401(K)
A 401(k) plan is an employer-sponsored investment opportunity, which is a pretty neat concept. But most people don’t know how to make the most of this unique opportunity, and the employer is usually unable or reluctant to provide advice regarding individual investment choices of the plan they offer. Since most plans have enough of the same ingredients, some guidelines can be given here without my having seen your particular plan.

LOOK AT YOUR TOTAL INVESTMENT PORTFOLIO
If you have investments other than the 401(k), organize them in such a way that you can see how your total investment portfolio is allocated. Start by grouping together by asset classes: the amount you have in cash (savings, money market funds, CDs, etc.), bonds (treasuries, bond funds, etc.), and stocks (equity mutual funds, stock options, etc.). Include in this breakdown the investments in your 401(k).

If all you have is your 401(k) and/or you don’t know how to identify the asset classes of your investments, you can come back to this step after reading the next sections.