Financial Planning for Generation X & Y Women
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Expert Q&A Archive

Is it better to have one 401(k) fund, or have money going in other funds as well?
I am currently participating in the 401(k) and have all my money in one fund. Is it better to have your money going to more than one fund? Also, is it a good idea to continue to contribute even though I am losing money?
Bettye J. Banks:
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Generally, you want to diversify your investments. All of your investment dollars in one fund can be quite risky. You also must know your risk tolerance. (How much can you afford to lose if an investments tanks?) Your age and the time you intend to stay in the market should determine where you put your money. You might want to talk to whoever manages your portfolio. This might be a good time to reallocate your funds.
Rebecca Schreiber CFP®:
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Yes, you should have your money in 5-7 different funds that track different parts of the economy. The goal behind this strategy is to always be invested in a part of the economy that is growing. Look for low-cost funds (low expense ratios) with common benchmarks (the index they are trying to beat). Look also for target-date funds that will diversify for you. Target-date funds are a one-stop-shop for people putting investment portfolios together for the first time. Look for one that is close to your expected retirement date and compare its expense ratio to other funds in your 401(k). As long as they're not overcharging you, start in a target-date fund. Once you start getting the statements, use them as a tool to learn more about investing so you can be confident in your investment decisions.
Joan Koonce, Ph.D:
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It is important to diversify with your investments, and usually that cannot be accomplished with one fund. It is important to know that just investing in more than one fund does not guarantee diversification. It is also important to examine the investments in the fund to make sure the fund's investments are diversified. Make sure that each fund is not a clone of the other. How many funds you should invest in is also determined by how much money you are investing each period. Some financial advisors recommend 5 to 8 funds depending on the amount of money invested. Most investments are not doing well during this time because of the economy. The market is down, but this is the best time to invest. The basic philosophy of investing is to buy low and sell high; however, the investments you choose need to be good, stable investments that will recover when the economy and the market recover. You need to research the different investments and/or get some assistance from a financial professional when deciding where to invest.

[Editor’s Note: You can obtain information on how to choose a planner from the Website of the Certified Financial Planner Board of Standards, Inc. at Click on “Learn About Financial Planning” under “Quick Links” at the top left of their home page.]
Rosemary Ervin, CPA:
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Your 401(k) plan administrator is required to provide you with certain key information, such as the summary plan description and the summary annual report (See What You Should Know About Your Retirement Plan on the Website of the Employee Benefits Security Administration at One fund is fine if your [time] horizon is 20 or 30 years off. If you are 50 or over, you need to allocate according to your age. If that is the case, you should be in several funds. Continue to contribute (the government is subsidizing because you do not pay tax on the contribution currently), but perhaps you may want to make current contributions go to a more conservative fund. Ask the plan sponsor if the investment advisor is available for your inquiry.
Michael A. Masiello:
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Yes, most times it makes sense to diversify into different types of mutual funds in a 401(k). Really depends on plan and offerings. You need to know different types and asset classes of each fund. Sometimes 2 funds, but both could be same type, i.e, Large Cap Growth. Yes, contributing now during a down market is one of the benefits of Dollar Cost Averaging. You are purchasing shares at lower prices and when the markets rebound, not if, you will see the benefit. I don't know your age, but keep in mind 401(k) is usually a long-term investment measured over years and decades, not months.

[Editor’s Note: Fund categories are discussed in the chapter of the Wi$eUp curriculum entitled “Becoming An Investor.”]
Gail V. Marquet:
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It's best to diversify your investment in different funds, i.e. bond, large cap, international, etc. I wouldn't move any of the money I currently have invested, but I would diversify future investments. I would definitely continue to participate in the 401(k), as investments are at an all time low, which is a great time to buy.
Gary Silverman, CFP®:
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One Fund?
That depends. Some funds are designed to be an all-inclusive fund. They tend to go by names like "Lifestyle," "Target-date," etc. These funds mix stocks (large, small, value, growth, U.S. or foreign), bonds, real estate, commodities, and other types of investments together. If you are using one of these types of funds, then one may be all you need. On the other hand, if you are in a single asset fund (all stock, all bond, etc.), then a mix is more appropriate. As for how to pick which mixed fund or what mix of single-asset funds to use, that's a different question.

Continue to contribute?
We're all guessing that; however, my mantra is "buy low, sell high." While we may or may not have seen the lowest of the lows, we're definitely not high. So, yes, I'd keep investing. Of course, all of this depends on your choosing the right fund or mix of funds for your retirement needs and risk tolerance.

Diversification of your investments can occur within 1 fund, which is broadly invested. Multiple funds can diversify against investment managers and be a benefit with large amounts of money ($250,000 + in each fund) for more specialized diversification with fund managers who
target specific areas of investing.

Connie K. Marmet:
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It is always a good idea to contribute to your 401(k), if you can. You are building for your future, and over time the markets have always done well. That said, these are trying times, but thinking long-term is still a good idea. Diversified investment is a good idea, as it spreads risk. Employer websites generally provide good information on diversification options and often provide ways to determine a good mix given your age and risk tolerance.
Delores Lenzy - Jones, CPA, CIA:
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Absolutely. Diversification (having your money allocated to several sources) is one of the primary rules in investing. You do not want to have all your eggs in one basket. Also, is it a good idea to continue to contribute even though I am losing money? Yes continue to contribute, but allocate to the funds that have the highest yields
Martha Fortune O'Brien:
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Regarding 401(k) participation, please consider at least three reasons to contribute to an employer-sponsored retirement plan:

• Saving systematically through regular pre-arranged contributions has been shown to be a reliable path toward creating wealth. There are books on this subject that a person can read to understand why this is true.
• Saving in a qualified retirement plan allows the participant to defer the payment of income taxes until later. The money contributed now grows without the burden of tax. This has been shown to increase the overall value significantly. Each person's tax situation is different, so it's important to consult your tax professional [if you have one] on what is best in your particular situation.
• Some 401(k) plans allow participants to borrow money against the value of their contributions. This can be an easy and inexpensive way to borrow money when other options may not be available.

Now, with regard to the question about contributing "even though I am losing money", losses are not realized until an investment is converted to cash or another investment. A participant in a 401(k) can expect the value of their account to be down every three to five years. It is important to remember that the value is the result of multiplying the number of shares or units owned by the market price of the share or unit. When the market price goes down, two things happen: you are buying new shares at a discount, and the overall value is lower. One of the reasons systematic investing is successful is the reinvestment of interest or dividends during periods when the share prices are lower. Without thinking, 401(k) participants who do not shift their investment options to cash during a market decline will be buying shares automatically at the lowest prices possible. Not only will the income on the shares already owned be reinvesting at lower prices, but the new contributions will be buying shares "on sale".

Having all your contributions investing into only one fund violates good principles of investing if the fund is not either a balanced fund, an allocation fund, or a target date fund set for your expected year of retirement. Balanced funds, allocation funds and the target date retirement funds actually have many different types of investments bundled into the one fund for convenience. Speak to an adviser for help with proper allocation on all investments you own. Proper allocation to different types of investments accounts for about 94% of long-term returns on investing. See a professional investment advisor about proper allocation. It is important.
Wendy Weiss, Ph.D.:
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You asked 2 good questions.
1. Is it important to have your 401(k) investments in more than one fund, and
2. Should you continue to contribute, even though the market is dropping?

Let me answer each question. First, it is a good idea to invest your 401(k) or as we say, allocate your money, to a diverse set of assets. That means that your money should be invested in at least some stock mutual funds and some bond mutual funds.

Now, I do not know what mutual funds are available to you [in your 401(k)]. If you have a mutual fund that is designed to allocate for you--this may be called a moderate allocation-- you might be fine with just one fund. Or if you have a mutual fund that is targeted for the year that you retire, you might be fine with that one mutual fund.

If neither of these arrangements mirror yours, please talk to your 401(k) [plan] administrator or look at the website for your 401(k). The administrator or the website may offer you a way to understand what your asset allocation should be. Generally, there is a set of questions that you can answer. The questions are about your age, or number of years to retirement, and how you feel about the market dropping over a few years or a few quarters. It then recommends the percentages that you should hold and the percentages you should direct to different mutual funds/ asset classes.

The traditional advice is to tell you that you are investing for the long term. So, if you have 10-20 years to retirement, you should not panic. In fact, when the market drops, you will be able to buy more shares at a lower (bargain) price

But most people have too much of their 401(k) invested in stocks and too little invested in more conservative investments like government bonds. You might want to send all new contributions this year to Government bonds. You can start to balance your portfolio--adding more conservative investments. And you are likely to reduce the volatility in your holdings.