Risks of target date funds

Funds within funds: Allocation issues

Target date funds are not funds by themselves. They are funds within funds. This can pose a problem when you want to own a certain amount in assets because there are many classes of funds in which you’ll be investing.

Blind investments

Target date funds are blind investments—they don’t take into account your goals or anything else in your portfolio. These funds also do not consider the implications of your other investments, the goals you’re attempting to achieve, the risks associated with those goals, or other income you may have in retirement.

Without these considerations, it’s as if this investment stands alone, which can be quite risky.

High expense

Target date funds appeal to people looking for a low-cost investment option. While many of the funds have low minimum investment requirements, they come with high expense ratios instead. These expenses include fees to instate the mutual funds as well as fees to manage them.

The benefits of target date funds

Despite the aforementioned issues with target date funds, millions of people continue to add them to their retirement portfolios. That’s because the benefits are often enticing enough to overshadow the risks.

Low minimum investment

Investing in target date funds doesn’t take a lot of money. You can start investing in some funds for as little as a few hundred dollars. This is attractive to investors just starting out or those that just want to dip their feet into the world of target date funding conservatively.

Hassle-free investing

Once you set up a target date fund, you can essentially forget about it. This appeals to many people who are not interested in becoming big investors but who want to start a little something in addition to their shaky 401(k).

Easy start

Many believe that target date funds are designed to fit everyone’s portfolio. This makes them simple because there isn’t much research involved.

Will you invest?

When trying to decide whether to add target date funds to your investment portfolio, you should thoroughly research your available options. Analyze asset allocation, diversification, quality of underlying funds, available fund families, and expenses involved.

Once you’ve researched all of these aspects, you’ll start to clearly see which one or ones are best for your portfolio, and you will be able to proceed with confidence.

Jeff Rose is a Certified Financial Planner who writes about financial planning topics at Good Financial Cents. His latest project, The Debt Movement, aims to help people pay off $10,000,000 of debt in 90 days. You can join the movement and get a chance to earn some of the $10,000 debt scholarship money by visiting DebtMovement.com.

Fee-only financial planner Brent Perry, CFP®, of Piedmont Financial Advisors, LLC, in Indianapolis, Ind., suggests asking your advisor these five retirement questions during your annual meeting:

1. What’s the current value of my retirement investment portfolio?
“People often have little idea of how much their retirement portfolio is worth,” says Perry. Ideally, you should look at your overall balance once a year and compare it to previous years. You may be reviewing more than just your work 401(k) plan; if you have personal investments or savings you’ve earmarked for retirement, your planner will tally these up with you as well.

Once a year is usually often enough to review your portfolio, says Perry. This helps you maintain a long-term view of how your investments are doing. It can also reduce your financial anxiety. “Annual reviews help mute the short-term market noise that you can get from the 24-7 financial and political media,” he says.

2. How much annual income will I need in retirement to cover my expected living expenses?
Your advisor can help you make an educated guess about how much you’ll spend in retirement. Then—particularly if you’re within 15 years of retirement—your advisor will likely take your retirement portfolio balance and multiply it by 5 percent (4 percent if you want to be conservative). The result will be how much you can withdraw from your retirement portfolio per year with a high likelihood of it lasting 30 years. For example: a $300,000 portfolio x 5 percent = $15,000/year of spendable money. According to Perry, this concrete information tells you whether you’re way ahead of the game (“That amount of income is great for me! I don’t need to save another dime!”); on track (“If I maintain my savings rate and get a reasonable return, I’ll be within the ballpark”); or whether you need to take action and save more.

3. Is my retirement portfolio properly diversified among stocks, bonds, cash, and so on? And is my money invested appropriately (not too conservatively or aggressively) for my life situation?
A good planner will help you determine the mix of investments that will allow you to reach your retirement goals with the least amount of risk, says Perry. Diversification is a big part of that. A diverse portfolio helps provide exposure to stocks so your investments at least keep pace with inflation—and possibly grow. Investing in less-volatile bonds and cash helps preserve your capital and protects your portfolio from wild swings in value.

Once your portfolio diversification is set, it generally shouldn’t change based on external factors (such as financial market returns or geopolitical risks). However, it can and should change based on personal factors. This is why it’s smart to visit your financial planner every year. For instance, did you or your spouse lose a job or experience a change in salary? Did you come into an inheritance? Have you gone through a divorce? Any of these things can change how much risk and return you seek with your retirement portfolio. Your planner can help you make adjustments.

4. How much am I paying for my investments? Are the costs reasonable?
Over long periods of time, investment fees can make a significant difference in your portfolio’s value. Perry says one major way to reduce fees is to favor index funds over actively managed funds. Your advisor should review your ongoing investment costs. You also face transaction fees for buying and selling investments. Your advisor can help you look for ways to avoid or reduce these costs.

5. Should I consider doing a Roth IRA conversion?
This entails converting all or part of a traditional IRA to a Roth IRA. With a conversion, you pay income taxes today on the converted amount. The money grows tax-free in the Roth IRA and can be withdrawn tax-free in the future. Perry says a key criterion (though not the only one) for determining if a Roth IRA conversion makes sense is if you expect your income tax rates to be higher in future years compared to the current year. This is a complex issue that you should discuss carefully with your planner.

Investing a portion of your money in a Roth IRA is also a way to make sure your retirement portfolio is tax efficient, meaning that you are keeping an eye on how much your investments will cost you in taxes, both now and in the future.

Teri Cettina is a mom of two daughters and freelance writer who specializes in personal finance and parenting topics. She blogs at Your Family Money. Follow her on Twitter: @TeriCettina.

Here’s a look at some of the different hidden costs that you may run across in your investment portfolio:

Fund management fees and expense ratios

Putting together and running a fund—a mutual fund, for example—costs money, and that is reflected by an operating expense charge called a management fee. This is expressed in what is known as an expense ratio: the amount of money charged for operating expenses in relation to the amount of money invested. So, for instance, a fund with an expense ratio of 1 percent will charge one dollar for every $100 invested. That fee is paid by having the amount deducted from your investment return. All things being equal, the lower the expense ratio of the investment fund, the better it is for you.

Transaction fees

Typically, every time your account buys or sells stocks, bonds, mutual fund shares, or just about any other form of tradable assets, a transaction fee is charged. The amount of the fee varies widely depending upon the brokerage firm, but it can range anywhere from $5 to $50 or more.

While a transaction fee should never prevent the making of an otherwise good investment decision, very active accounts can have their bottom line significantly impacted by these charges.

There are some online brokerages that don’t charge transaction fees on certain types of mutual funds and ETFs, but each brokerage is different, so be sure to inquire about which investments meet these criteria.

Sales commissions

Some investments may include an upfront sales charge that goes to the salesperson. Common examples of these include the following:

• Front-end sales loads on some mutual funds. This one-time charge is over and above the management fees charged by the fund. By law, front-end loads cannot exceed 9 percent. Five percent to 6 percent front-end loads are common.
• Commissions on annuity sales are often covered in the form of surrender charges—a penalty that the investor has to pay if the investment is sold before a certain amount of time has gone by (from one to 15 years).

Back-end loads

Back-end loads are penalty fees that some mutual funds and annuities charge at the time of sale, depending on how long the investor holds the share. The fees usually amount to 5 percent or 6 percent of the sale price, with that amount declining over time until it eventually disappears completely. As is the case with front-end loads, this fee is in addition to the fund’s management fee charge.

Annual account fees

Some brokerage and mutual fund accounts charge an annual fee that ranges from $25 to $100. In an IRA, it’s often referred to as the custodian fee. The annual fee is on top of other fees and is difficult to distinguish from administrative management fees. Not all firms and funds charge an annual fee, so be sure to ask if yours does.

Minimum threshold or small account fees

Another fee that your brokerage firm may charge is a small account fee. Typically this fee is charged if your account doesn’t generate enough commissions or fees to meet the firm’s minimum threshold. This fee can range anywhere from $25 to $100 per year.

By knowing exactly where your investment money is going in the form of fees and commissions, you can make better personal financial choices and be certain your investment portfolio is getting the best bang for your hard-earned buck.

Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance.  Learn more about his Roth IRA Movement that has inspired over 140 personal finance advisors to educate young adults on the importance of saving. 

Why you might seek a financial planner

You may choose to hire a financial planner because you are seeking one or more of the following:

• Investment advice
• Budgeting help
• Help with paying off debt
• Savings assistance
• Retirement account management
• Advice about your mortgage or real estate investments
• Tax preparation
• Personal insurance guidance

The most common time to consult with a financial planner is when you are in the middle of your career, whether you are single and looking to start up an investment portfolio or you are settled with a family and need a wide range of financial advice.

While a financial advisor can help you build wealth throughout your working years, this kind of money professional is just as important to consult when you reach retirement age. Retiring usually comes with a set income, and you will likely need someone to help you manage your funds so that you don’t have to go back to work. An advisor will also help you determine when you should withdraw from your investments, as well as how much.

How can a financial planner help you?

A financial planner isn’t just there to help you with plotting your investment strategy; he or she can also assist you in determining how to pay off debt to make it easier to invest and to save your money for the future. Before getting too involved with a retirement investment strategy, a financial planner will make sure that you have a good budget and enough savings to begin investing.

Investing tip: Don’t overlook a financial planner’s services

One reason why many people skip out on professional financial advice is because they feel they can’t afford it. Retirees are especially wary of spending more money than they need to because they are on fixed incomes. However, financial advisors are worth the cost when you consider the amount of money you can save in the long term. Don’t be afraid to ask for help. You don’t have to wait until you have a lot of money to invest or are approaching retirement—it can be beneficial to consult with a financial planner at any life stage.

In the end, the best investing tip I can give for finding a financial planner is this: Shop around for quotes—and choose wisely.

READ MORE:
Expert Retirement Advice: Bud Hebeler
Retirement Planning: Most Affordable Places To Retire
Investing Advice For Selling Your Gold
Investing in Company Stock: Pros and Cons
Beginning Financial Building Blocks

Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance.  Learn more about his Roth IRA Movement that has inspired over 140 personal finance advisors to educate young adults on the importance of saving. 

A reverse mortgage is a government-insured home loan that lets homeowners convert a portion of the equity in their home into cash. A reverse mortgage may also be referred to as a home equity conversion mortgage (HECM).

The key difference between a reverse mortgage and a traditional home equity loan is that reverse mortgage consumers must be age 62 or older, must own the home outright (or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan), and must live in the home. The Federal Housing Administration (FHA) also requires consumers to attend a counseling session with an approved HECM counselor prior to obtaining the loan.

Unlike a traditional home equity loan or second mortgage, reverse mortgage borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or until they fail to meet the obligations of the mortgage.

It’s important to note that while the government insures HECMs (through the FHA), HECMs are not government loans. They are loans issued by banks.

The National Reverse Mortgage Lenders Association (NRMLA) is introducing a new information source for consumers interested in reverse mortgages. The website and the NRMLA’s 24-page road map booklet, titled “Borrow with Confidence,” combine to create a comprehensive resource that explains every aspect of a reverse mortgage.

Before you talk to a reverse mortgage lender, it’s a good idea to educate yourself on the types of reverse mortgages available. It’s important to understand which one suits you best and to find a lender that can offer it to you.

Types of reverse mortgages

1. HECM standard
Traditional HECMs began as a lending practice in 1989. There are currently more than 500,000 issued HECMs in the market.

Cost: Fees include an origination fee, an upfront mortgage insurance premium (MIP), a servicing fee, and traditional closing costs. “It’s the upfront mortgage insurance premium paid to HUD/FHA/FED that adds a cost,” says Peter Bell, president of the NRMLA. “[That premium is] 2 percent of the value of the home at the time of origination.”

Target: Senior homeowners who need the most money available to them.

2. HECM saver
The HECM saver is a lower-cost version of a HECM Standard. HUD and the FHA introduced it in October 2010. Since the introduction of the HECM saver, a new group of seniors have entered the market who might not have chosen a reverse mortgage before. The HECM saver is low risk and has more maneuverability, according to Kelly Sabino of US Mortgage Corporation.

Cost: Saving money comes from a lower upfront MIP and only a .01 percent upfront PMI premium. With the lower mortgage premium, the borrower gets a reduced amount of money available, ranging from 10 to 18 percent less than the traditional product, depending on age.

Target: Seniors who don’t need as much liquid cash and/or who don’t want to pay the higher fees. The NRMLA notes, “Because the fees are lower, and no monthly payment is required, it may also prove to be a better option than obtaining a home equity line of credit.”

The HECM saver borrowers are savvier, and they tend to have a more of an investment portfolio. They want to leverage their home, but still protect the equity.

3. HECM for purchase
The previously mentioned HECMs are most commonly used to eliminate debts, pay for healthcare and cover daily living expenses. However, the HECM for purchase is increasingly being used by seniors to purchase a home that better suits their needs.

It’s a different kind of home buying process. For example, a senior can take the proceeds of a HECM loan, pay off their existing mortgage, and downsize into a new home that better suits their needs. They may need to supplement the reverse mortgage proceeds with funds from selling a home, private savings, gift money, or other sources of income.

Cost: No monthly mortgage payments. Home-buying process costs could be covered, depending on the house into which you downsize.

Target: Seniors looking to downsize their home or move to a house that better suits their current needs and who do not need to use the money from a HECM.

4. Proprietary reverse mortgages
Right now, very few proprietary reverse mortgages exist. Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages because they are taken on higher-valued homes. These loans are not insured by the FHA, but they are backed by the companies that develop them. According to the FTC, these “jumbo” reverse mortgages are more expensive because, “the more you borrow, the higher your costs.”

These loans aren’t readily available in today’s tight lending market, but if your lender offers you a proprietary loan, ask to see a side-by-side comparison of the costs and benefits between a HECM and a proprietary loan.

READ MORE:
Winter Home Maintenance and Weatherproofing Tips
Selling Your Home: Low Appraisal Options
Where Have All the Buyers Gone?
Buying A Home: Estimated Closing Costs
Hidden Benefits of Buying a Home
Housing Market Predictions: More Foreclosures on the Market

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

Step One: Determine your retirement budget

The first step in retirement planning is to determine what your retirement budget will be. Most of my clients hate doing this because of two things:

1. They have never done it before.
2. They don’t know where to start.

Retirement planning doesn’t have to be scary or intimidating. When calculating a retirement budget, you won’t get it to the exact penny, but any calculation is better than nothing.

If you have a current monthly budget, you can work from that; if not, you will need to start from scratch. A monthly budget will help you evaluate your expenses and income, and it will also help you figure out new ways to save money.

Make a list of all the expenses you anticipate having once you retire. This would include the cost of housing, utilities, food, clothing, and so on. Keep in mind that your retirement budget may look a little different from what your budget is today. For example, you may no longer have a mortgage payment, you may have no need for work clothes, etc.

You may, however, have new expenses to consider. Do you plan to take up a new hobby in your retirement, increase traveling, or eat out more often? Make sure you include every possible expense—and maybe even some extra money for a rainy day.

For additional help, see my fellow blogger Mechel Glass’s tips for writing a budget and saving money.

Step Two: Determine your fixed retirement income

Next, you need to calculate what your fixed retirement income will be. For example, will you be able to collect Social Security? Does your company offer a pension? Will you have any other sources of income to consider? Total your income and subtract it from your budget.

Your investment portfolio allocation also factors into determining your retirement income. I talk with many people who are skittish of the stock market and so would rather invest their entire portfolio into bonds and CDs. That might be fine if they have millions and millions of dollars saved, but most of us are not in that position.

The fact remains that if you need a certain amount to retire comfortably, but your current retirement savings are inadequate, some risk must be taken. Otherwise, you will surely outlive your investment portfolio.

I usually recommend beginning with around 25 percent in stock and 75 percent in bonds. It’s a good starting point to get your feet wet and see how the markets work. With time, and by using dollar cost averaging, you can eventually get to your optimum asset allocation.

Step Three: Determine how much you need to save before you retire

Your next step is to calculate the total amount you will need to have saved before you retire. With your budget in hand, you now know how much you will need to have available. Multiply that figure by 12 and you will get the approximate dollar amount you will need each year.

Now comes the tricky part—deciding at what age you plan to retire and how long you think you might live. Keep in mind that if you want to retire early, you will need to cover additional expenses like healthcare coverage until you are eligible for Medicare. With these figures, you can come up with a pretty good estimate of the dollar amount you will need in your retirement account in order to feel secure when you retire.

Step Four: Determine your retirement date

Looking at the dollar amount you have now and what you need to have by the time you retire can help you determine when your retirement date can be, but many people forget to calculate factors like inflation and cost of living adjustments.

In 2008, inflation was a mere 0.1 percent, and it has been relatively stagnant since, so it hasn’t been on many people’s minds. However, this needs to be a factor in your calculations. For example, in April of this year, inflation hit above 3 percent for the first time in three years.

What does that mean for your portfolio? I always suggest that people expect a higher rate of inflation, say 4 percent, when projecting their retirement needs. If we’re wrong and inflation is only 2 percent, then we have that much more of a cushion.

Step Five: Still confused? Get help.

If this is all seems too overwhelming, you may want to consider working with a financial planner. A financial planner will be able to help you determine how much money you will need for retirement and what steps you need to take to get there.

READ MORE:
Expert Retirement Advice: Bud Hebeler
Retirement Planning: Most Affordable Places To Retire
Investing Advice For Selling Your Gold
Investing in Company Stock: Pros and Cons
Beginning Financial Building Blocks

Jeff Rose is an Illinois Certified Financial Planner. He blogs at Good Financial Cents and Soldier of Finance. He loves Crossfit workouts, writes about Roth IRA rules and craves In-N-Out burger. You can follow his updates on Twitter.

It’s natural to be nervous about investments, especially those that could be risky, but a good investment strategy can help you get over your fears.

The question is: Are these fears substantiated—and how should investors deal with them?

Diversify your investment portfolio

Every good financial planner will tell you that one of the best ways to alleviate fear when it comes to investing is to diversify. The saying “don’t put all your eggs in one basket” is one to adhere to. While some of your investments, especially when you are younger, should be riskier, that doesn’t mean they all should be. When deciding how much risk to take, look at your current financial situation, your age, and what you hope to achieve.

Don’t try to time the stock market

Trying to time the stock market can make investing stressful, and the fear of timing it wrong may keep you out altogether. Instead, invest consistently into the stock market. For example, you could automatically have a certain amount deducted from your regular bank account on a weekly or monthly basis for investment purposes.

Additionally, don’t watch your investments every day. In order to make money, you really need to be in it for the long haul. Watching the market daily can create undue fear that may have you cashing in your investment too soon. This can cause missed financial opportunities.

Think long term

While the market does fluctuate from day to day, for most investors it is about what they can make on their investments over time. It is unrealistic to think that your invested money should make you a fortune in a short period of time. Relieve your fear by thinking about your investment portfolio as a long-term financial life strategy.

Always keep some money safe

While investing money is an important component in becoming financially secure for your future, you should always keep some money safe and on hand. Creating an emergency fund for the unexpected can help alleviate investment fears. Your emergency fund should have enough money to cover at least three to six months of your daily living expenses. Having an emergency fund can give you peace of mind and allow you to invest more freely.

Just get over the fear

Those who fear are the ones who miss out on some of life’s biggest opportunities. If your investments are driven by fear, more than likely other parts of your life are dictated by fear as well. Fear can cripple us and can cause us to miss out on life.

When you conquer your fear, you just may be amazed at what doors open, including ones that can offer you financial security in your future.

READ MORE:
Expert Retirement Advice: Bud Hebeler
Retirement Planning: Most Affordable Places To Retire
Investing Advice For Selling Your Gold
Investing in Company Stock: Pros and Cons
Beginning Financial Building Blocks

Jeff Rose is an Illinois Certified Financial Planner. He blogs at Good Financial Cents and Soldier of Finance. He loves Crossfit workouts, writes about Roth IRA rules and craves In-N-Out burger. You can follow his updates on Twitter.

Like most of us, I want the economy to show much more strength before I make any significant changes to my spending and investment plans. But for others, the time may be right.

Five major purchases or financial moves to consider while rates are low

Buying a home. While low interest rates are not reason enough to make the plunge into home ownership, for consumers already considering buying, it may just be the right time. In many markets, home sales and prices are relatively steady or have begun to rise slightly. Rates on long-term, fixed-rate mortgages are at their lowest in decades.

Not sure how much house you can afford? FHA and VA government loan programs may allow you to apply a higher percentage of your gross monthly income towards a home loan, and the various mortgage companies may also have a different percentage; at CredAbility we recommend no more than 38 percent of your income should go towards housing obligations.

Buying a car. While car loan rates have not dropped as significantly as mortgage rates, they have begun to come down, and many manufacturers are offering special financing options and other incentives. If you really need a new car, do your homework. Know what you want to buy, and compare offers to ensure that you are getting the best deal.

Refinancing. If you are in an adjustable-rate mortgage and plan to stay in your home, this is a great time to refinance into a fixed-rate loan. It may also be a good time to refinance your long-term, fixed-rate mortgage. If you purchased a $225,000 home five years ago and had a rate of 7 percent, your payment was about $1,500 per month and you have already paid more than $76,000 in interest. Refinancing the balance of that loan now at 3.5 percent for 15 years will save you almost $175,000 over the life of the loan and let you pay off your home almost 10 years sooner. Plus, your payments will only go up about $25 per month. Each situation varies; you can visit www.bankrate.com or Equifax Mortgage Match and use those calculators to compare rates and payment.

Paying off your debt. Even if you’ve paid down your mortgage, home equity, and credit card debt during the past three years, you still may want to pay off more debt. Many certificates of deposits and savings accounts are paying little to no returns, and consumers will be better off in the long run to reduce or eliminate their credit card debt. It may also be a good time to negotiate rates with your creditors, especially if you have maintained an on-time payment record and have continued to make at least minimum payments.

Reviewing your investment options. If you can afford to send more money to your 401(k) or 403(b) account, do it, especially if your employer continues to match or contribute to it as well. In addition, talk with your financial advisor about alternatives to savings and money market accounts. It may be the right time to expand your investment portfolio and explore options to earn greater returns on your savings.

READ MORE:
Identity Theft: Dealing With A Data Breach
Identity Theft: Can Fraud Alert Protect You
Common Financial Mistakes from David Bach

Mechel Glass is the Director of Education for CredAbility. In this position, she is responsible for developing the curriculum and educational materials for online classes including webinars, podcasts, videos and listen-on-demand classes. She is responsible for managing the agency’s community outreach programs and staff, including financial education specialists in a 14-county area throughout metro Atlanta and north Georgia. She also manages the development and reporting of education partnerships online for the agency.

The past several years have been rough on many 401(k) participants. The 2008–9 market decline had a devastating impact on many participants nearing retirement. The press, and many annuity salespeople, have had a field day bashing the 401(k) as a poor retirement savings vehicle.

The reality is that 401(k) accounts are a part of your investment portfolio and need the same attention and monitoring that your IRAs, stocks, and mutual funds do.

Many will debate whether it is right or fair to put the onus for funding retirement on the backs of employees. Let’s leave that debate to others and focus on how to make the best of your plan and investment options.

For those who are starting out in their careers, my suggestion is to contribute as much as you can afford to your retirement plan. At the very least, try to contribute enough to receive the full company match. You have the luxury of time and the ability to take advantage of many years of compounding your investment returns.

For those of you in the middle of your career, you should think about maxing out your contributions. This can be tough, especially if you are also trying to save for your kids’ college educations, let alone incurring the ongoing costs of raising a family. The expectation at this point is that your career is on the move and your compensation is rising as well.

As you get closer to retirement, continue to max out your contributions. You might be in the middle of your kids’ college years as well. Keep in mind that the best gift you can give your children is not being a burden to them financially in your old age. Save all you can at this stage.

Here are some investing tips for any age:

• Diversify. Allocate your assets in accordance with your retirement goals and your risk tolerance.
• If you have investments outside the 401(k) plan, allocate your 401(k) as part of an overall portfolio, not as a stand-alone account.
• If your plan is lousy, try to choose the best couple of funds in the plan and focus your contributions there. This assumes you have investments outside of the plan and can balance out your overall allocation with those outside investments.
• Don’t assume that your 401(k) alone will be enough for retirement.
• If you go with the plan’s target-date fund, make sure you understand the pros and cons of this option.
• Don’t overindulge on your company stock if that is a plan investment option. If you don’t know why this can be hazardous, just find a former Enron employee, who can unfortunately speak volumes about this.
• If you think your company’s plan could be improved, talk to the plan’s administrator. Do your homework first and approach him or her in a polite, businesslike fashion.

Your 401(k) plan is likely your biggest retirement savings vehicle. Be in control of it; make it work for you.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

Investing is not like eating. You don’t want to try something new every day. Your investing strategy should be like eating the same meal day after day. The only time it should be adjusted is when your tolerance for risk or your investment objectives change.

If you’re doing it right, sound investing makes watching grass grow seem exciting.

I have put together four basic rules that should guide your investment decisions. Following them will help you solve the investing Rubik’s Cube.

Investing Rule #1: Ignore the financial media.

I know this piece of advice seems counterintuitive. The financial media want you to believe you need to be up on the latest business news or you’ll risk a devastating blow to your investment returns.

Of course, the financial media are conflicted by self-interest. Ratings and readers mean higher advertising rates. It is this quest for revenue that motivates the breathless reporting from the floor of the NYSE, rather than advice grounded in sound principles of investing.

Understand this: Today’s news does not affect stock prices or stock markets. Tomorrow’s news affects both. The financial media doesn’t know what tomorrow’s news will be.

Ignore them.

Investing Rule #2: There are no financial “gurus.”

This investing rule is a lot like breaking the news to a child that there is no Santa Claus.

But here’s the truth: There are no financial gurus out there who can pick stocks, time the markets, or pick hot mutual funds. Not Jim Cramer, not your broker or adviser, not any software program with green (“Buy now”) and red (“Sell now”) lights, not the authors of newsletters, not the anchors at CNBC or on the misnamed Fast Money TV show—despite the great confidence with which they dispense their opinions.

They are all selling an expertise that doesn’t exist: the ability to predict the future.

Investing Rule #3: Don’t buy individual stocks or bonds.

I don’t understand why so many investors buy individual stocks and bonds. Doing so will increase the risk of your investment portfolio significantly but won’t increase your expected returns.

Here’s what I mean.

Let’s assume your broker recommends the purchase of Exxon Mobil Common stock (XOM). Exxon is one of the stocks in the S&P 500 index. Should you buy Exxon or an index fund that benchmarks the S&P 500?

With Exxon stock, you are assuming the risks unique to it, like a major oil spill caused by one of its tankers that could send the stock into a precipitous decline. With an index fund, you have diversified away that risk. Of course, the index is still subject to the ups and downs of the markets, but it is far less volatile than any individual stock.

It’s really a no-brainer. The index trumps the individual stock because the expected return of the index is about the same as the expected return of the stock, but with far less risk.

Investing Rule #4: Focus on factors that really matter.

Here are the factors that really will affect your returns over time:

Asset allocation: Nothing is more important than the division of your portfolio between stocks and bonds.

Global diversification: We live in a global economy. Your stock and bond portfolios should be globally diversified.

Low-cost index funds: Your portfolio should consist only of low-cost stock and high-quality bond index funds, available directly from major fund families, like Vanguard, Fidelity, and Charles Schwab.

Following these four simple investing rules will keep you on the narrow path toward investing success.

Where have you had investing success?

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read. His latest book is The Smartest Retirement Book You’ll Ever Read.

Follow Dan Solin on Twitter.