How You Can Best Invest In 401(k)s, IRAs (


Most workplace retirement plans offer a variety of investment options, ranging from low risk—such as money market funds—to high risk, like stock funds, with many flavors in between.

Knowing which of these offers you the best chance to earn a decent return can be confusing and daunting. Here I’ll explain how to invest in a way that can help you reach your retirement goals.

Your current contributions: Simply put, the best way to invest the money that’s regularly deducted from your paycheck is to invest in stock funds.

Too risky, you say? That might appear to be the case when we recall that, during the 2008 credit crisis, the Dow Jones Industrial Average fell 54 percent in just 18 months.

However, I’m not talking about investing a lump sum in the market at once. Instead, you’re putting in only a small amount from each paycheck, a strategy known as dollar cost averaging. If the market happens to be down at the time your contribution goes in, it simply buys more stocks—as if buying them on sale! Later, when the market bounces back, you will enjoy a greater profit.

I often espouse the importance of having a well-diversified portfolio, owning a wide range of asset classes for the long term. That’s diversification by asset class. Dollar cost averaging is simply diversification by time.

Here’s an example of how this might have worked during the 2008 crisis: If you invested at the market high on Oct. 9, 2007, and stopped there, your balance would have been down 54 percent at the low on March 9, 2009, and you wouldn’t have returned to the break-even point until March 5, 2013.

But if you were contributing regularly all that time—say, $1,000 a month—your loss on March 9, 2009, would have been about a third less than the Dow’s, and you would have recovered your losses by January 2011—more than two years before the Dow itself did.

What’s wrong with the other choices available in your plan? Some, including bonds, cash and other types of assets, might be appropriate later, when you’re ready to diversify the money you’ve accumulated, but stock funds deliver the best returns for your new contributions.

Instead of trying to choose which individual stock funds will perform best, invest in as many stocks as possible that vary by style (growth and value), cap (large, medium and small), sector (type of industry or geographical location) and so on.

You’ll invest in all of these through mutual funds or—preferably, if you can—exchange-traded funds, which offer many advantages, including much lower cost.

If, instead of a 401(k), your employer offers another type of retirement plan—such as a 401(b) or 457—stock funds are still your best option. Fixed annuities usually provide low returns. Variable annuities are just mutual funds wrapped in insurance, making them far costlier, unless your company offers groups of annuities, which can be lower in cost.

Edelman, Ric. “How to Best Invest in 401(k)s, IRAs.” Web log post. CNBC. N.p., 2 June 2014. Web. 16 Apr. 2015.

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For more information, contact our Recruiting Manager Allie Vossoughi at & 602-314-7580, or Thomas Shultz, Managing Director  at & 602-314-7580, or Scottsdale Associate Managing Director Nancy Monaco at & 602-314-7580, or Scottsdale Associate Managing Investment Director Tom Bugbee at & 602-314-7580.

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Thomas Bugbee

Futurity First Insurance Group

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