401k Investing: Compare with Co-workers
If you’ve working in an office, you know it’s a common rule to never discuss salary with your co-workers. But what about your 401k? Salary rules exist for a reason, nothing good will ever come from those conversations. However one overlooked discussion is your retirement. The best way to secure the good life is by first contributing to your plan and second by choosing the right investments. This always brings up one major problem though…how do you pick the right funds? This question often goes unanswered by companies, leaving you to fend for yourself. How do you know if you chose the best investment to provide you the best return?
Why it Matters
Several years ago I didn’t pay attention to how my 401k was invested. At the time I knew little about investing so I just ignored the subject. I picked funds based off their title as opposed to historical data, which is a terrible approach. Then at the office one day someone brought up the fact that they made an ROI of 6% that year. They were pretty excited to share this news and talk about retirement. This immediately peaked my interest so that night I decided to see how my money was doing. To my horror, I had actually lost money, -0.6% for the last 1 .5 years to be exact. Sometimes it takes a slap in the fact to bring you to your senses and that night I decided this would never happen again. After all this wasn’t just any money, it was literally my retirement ship setting sail without me.
Choosing the Right 401k Funds
There are two main methods I use to pick 401k funds. The first thing you should do is review the data. Trust me when I say you don’t have to be a rocket scientist to do this. Simply bring up the funds/investment data on their website, then start comparing the 3, 5, and 10 year percentages. Immediately you will see winning funds and losing ones. It won’t take you long before you narrow in on a handful of good choices, and that’s where you want to start. Remember to pick more than one so don’t have all your eggs in one basket. If you want to take it one step further you can export these into Excel and average out the total ROI for those 3 periods, but you don’t have too. After making your selections let them ride for 3 months and see what your return percentage is.
This number gives you the starting point you need to begin the next step, conversations with co-workers. Remember you don’t want to talk about dollar values, it’s only the ROI percentage you’re after. Once you set that ground rule, you’ll be pleasantly surprised to learn you’re not alone. The first time I had this a conversation with a friend it set off a chain reaction comparing funds with several different co-workers all searching for the best results. The more data points we compared the faster we were able to identify the top winning funds. Since that time my 401k has treated me well, producing returns as high as 13% and as low as 4%. Even at my lowest return I sleep well at night knowing my retirement is on a good path.
