What to Do With $100,000 in Today’s Economy
October 29, 2012I actually get this question quite a bit on our financial helpline and in our worksite financial planning sessions, not so much that someone got an inheritance (though I did get that last week), but many people simply want to know how they should allocate their assets in their own 401(k). The question doesn’t have a quick and easy answer and answering involves asking a series of questions first because investing starts with you – the investor. Obviously, an aggressive investor is going to have a very different investment mix than a conservative investor. A fifty year old may have a very different investment mix than a twenty year old no matter what the current economic outlook. Here are some questions I always start with:
What is your risk tolerance? If you aren’t sure where you fall in terms of being conservative, moderate or aggressive, answer a few questions on this risk profile (click here). When you take the quiz, do so based on each specific investment you are considering. What I mean by this is, take the risk tolerance quiz solely for your retirement assets first. Then if you have funds you are saving for another goal, take the quiz again based on that particular goal. Your answers often are and should be very different for each investment you are considering.
What is your time frame? For retirement assets, this isn’t when you plan on retiring per say but when you plan on spending the funds. You usually don’t retire and then cash in your account and spend all the money at one time. Most people take income from their 401(k) in retirement or take withdrawals from time to time as needed. Your time frame may still be long term if you are within five years of retirement but you don’t plan on tapping your entire 401(k) right away.
Do you like to manage your investments yourself? Many people don’t and target date retirement funds are very popular with those who aren’t do-it-yourselfers. Target date funds are set up on a system – a glide path – where they start out aggressive when you are younger and get more conservative as your retirement date gets closer. They are designed to “set it and forget it.” For those who don’t like to manage their funds themselves, this is a very appealing feature.
If you do choose target date funds, just remember to check the investment allocation – the mix of investments. Many funds with long range dates start out very aggressive with 90% in stocks, which carries a high degree of risk. Just because your retirement date is in 2050, you don’t have to pick that fund. If you are more of a moderate or conservative investor, consider choosing a closer target date such as 2020 or 2015.
If you are a do it yourself investor, use the sample portfolios from the risk tolerance profile (click here) and choose a mix of investments that is suitable for you but then be sure to set up your account on “auto-rebalancing.” This way your mix of investments always stays within your risk tolerance – doesn’t get too aggressive for you.
Now you have an idea of your investment mix based on your personalized investment goals and your temperament. No one can really predict how the stock market will perform – whether a strong bull market will return or not. No one can predict when interest rates will come back up, though we cannot imagine they could go much lower. So the best thing to do with the $100,000 in your 401(k) is to invest in a mix of investments based on your time frame and your risk tolerance with the goal of getting the best risk-adjusted return possible in today’s economy.