401K (Photo credit: Tax Credits)
I just finished reading “Most Common Investment Mistakes for Beginners” and it’s the umpteenth iteration I’ve read online. It’s become a hobby of mine to read these posts and see if an author will finally mention the big 401k elephant sitting around the cubicle farm, but I’m always disappointed. I suppose that it’s up to me then. Don’t copy the asset allocation of your co-worker!
I’m hoping that this doesn’t need a lot of explanation, but I’m tired of waking my office halls and hearing armchair stock traders give away their secret asset allocation to the newly hired young adult. Following someone else’ asset allocation is a terrible mistake that many new employees make.
I understand why. You are given several forms to fill out when you are first hired: insurance, W2 and an endless number of company policies. By the time you get to setting up your 401k, who has time to look over dozens of prospectuses and learn about what funds are right for your investment goals. Beside, the guy next to you seems to be doing well, what’s the harm in copying someone else’s investment strategy?
Risk Tolerance
Everyone has a different risk tolerance and it’s important to decide your own sensitivity. You can lose massive chunks of your savings in a short amount of time. At the same time, it’s easy to take on too little risk and watch your savings stagnate or dwindle when matched with inflation. It’s good to take calculated risks that can earn you a justifiable return. However, you don’t want to be shocked by unexpected losses or stagnation from too much or too little risk exposure.
If your co-worker is a smart investor, they’ve thought long and hard about the risks to their portfolios. They’ve fine tuned their investments to fit them personally, which is precisely why their allocation is not going to work for you.
Retirement Needs and Goals
Is your co-worker the same age? Have the exact same financial situation? Striving for the exact same retirement?
Your asset allocation needs to reflect the realities of your unique situation. Your allocations should change as you age. You might need to take on more risk if you are behind in saving. You’ll need safer investments as you near retirement age. You may dream of a more lavish retirement. All these little factors need to be considered when investing. Unless, you are copying from a co-worker clone, you’ll need to plan out your own portfolio.
Sidestepping Bear Traps
How much time and effort has a co-worker really put into their retirement efforts? Do they chase returns and neglect investment details like portfolio fees?
The average person is completely unaware of some of the finer details of investing. For example, although funds may encompass large volumes of stock in different companies, some funds are targeted towards individual industries, like gold and need to be diversified with a more balanced fund.
Different funds have different fees. Those fees will negatively impact your fund’s long-term growth.
Does your co-worker understand and account for this?
Get Professional Help
If you are tempted to copy a co-worker’s 401k allocation, then it should be a sign that you need to talk to an investment professional. I know this opens up other issues about who you can trust and if the advice is worth the money. However, there are few financial decisions more complicated than your retirement. It’s worth spending some money to do it right.
When in the office:
- Copy your boss in on your important emails and cover yourself
- Copy and save your performance reviews, they look good in future interviews
- Copy and paste shortcuts for Office are a great way to be more efficient in Excel
- Please, never copy your co-worker’s 401k asset allocation!
Have you ever seen c0-workers copying 401k allocations? What other investing mistakes are common from your co-workers?
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I admit when I first got started with investing, my boss gave me some advice. While definitely had good intentions, the advice didn’t fit my time frame or risk tolerance.
When I looked into it myself, the investments he had were too conservative.
It’s very common for people to do. My latest job actually had a default allocation figured out, which was actually pretty close to what I wanted to do, but was way too risky for those closer to retirement.
I took those risk surveys and that, along with some common sense knowledge of what I want, determined my own allocation. It is even worse when a young person copies someone’s allocation who is deathly afraid of the markets when the young person is willing to take risks.
It’s a great point Lance. I almost left out too little risk from my original post, however, it can be just as dangerous as too much risk. If you want good, steady growth, you need to know what you are doing.
The old guys at my office were way more speculative than I wanted to be – picking out specific biotech companies and smaller IT companies. The IT they knew and understood-but they were mostly gambling with the biotech.
I picked funds that seemed to match what I was looking for then, but coming up on 4 years later, I’m due to look at these again hardcore over the next few months and see if they still make sense or if I need to shuffle some around.
It’s good to reassess, but make sure you aren’t just chasing returns. It’s best to have an overall strategy and good funds and investments to match.
Given the perceived time pressure to complete forms, it’s tempting to copy someone else when starting a 401k plan. But adjustments are easily made after more research and contemplation.
Once upon a time I witnessed three gambling-inclined colleagues wager on the returns posted by their 401k accounts. This went on for months! They even kept track of the results on a whiteboard in one guy’s office. To the extent the game focused their minds on their investment strategies, I guess their competition was a good thing.
That’s a good point. Better to copy than not setup the 401k to begin with. The perfect is often the enemy of the good.
We don’t have a choice – we have a pension plan that everyone has to contribute to
So the only risk is whether the employer is doing a good job managing it.
I do find it interesting to talk to my colleagues about their personal investment strategies, but I find that most of them are too risky for my taste!
Yikes. I’ve known lots of people who’ve seen their pension go up in smoke with the company offering the funds. Few companies last long enough for you to work up a pension and pay you through 30 years of retirement.
My workplace automatically enrolls us in a lifecycle fund appropriate to our age, which is probably a lot better than what most people would choose on their own. It’s crazy how many people at my company own company stock though in their 401k. Not sure why, there’s no benefit or extra discounts, maybe they forgot about a company called Enron??
You can change your allocation if you’d like though right?
I’ve always included our 401k stocks, bonds and funds in our overall asset allocation and adjusted holdings accordingly.
According to what I’ve learned, it matters more what allocation you have than the specific investments within each part.
It’s definitely worth spending some time learning and not trying to find the crib sheet.
Great advice as always. I never even asked anyone else what to do with a 401(k). But I have a finance background, so I always kind of knew what to do.
It is important to have a strong, diversified account that matches your long term goals and understand both the investments and how they will help you.
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