Consult a professional for investment advice By Steve Conard, CFP, Compass Financial Services
The advantages — professional investment management, instant diversification and low investment minimums — cannot compensate for the limitations wrought by their inflexible design when markets are declining. These limitations include:
• “Always In” investment mandate. Investment managers must operate within the confines defined in their prospectuses, which generally require them to remain fully invested in their defined sector regardless of prevailing market conditions.
• Relative performance orientation. Performance ratings and manager compensation are based on returns relative to their peer group and benchmark index, rather than on the absolute returns earned for shareholders. An investment that loses 20 percent can earn a top rating a long as its benchmark lost 25 percent; shareholders might prefer to own a low-rated investment that made them a little money.
• “Buy-and-Hold” product design. These types of vehicles are designed to be long-term investments for shareholders who entrust investment decisions to professional managers. When jittery shareholders dump their shares during times of market distress, they do so to the detriment of the shareholders who stay put by forcing the manager to sell holdings at depressed prices, thus hurting future returns.
Given these realities, even the finest offerings run by top managers can’t protect shareholders from losses during a bear market. This underscores the importance of not relying too heavily on past performance or a history of market-beating returns when selecting investments. Within a typical 401(k) menu, a selection process that looks beyond past performance to incorporate offerings with a diversity of market exposures is likely to cushion the effects of sliding markets more effectively than any top-performing offering that is fully exposed to the stock market.
Your employer cannot directly offer investment advice to participants in its 401(k) plan, so consult a qualified investment professional for assistance in navigating your plan’s menu of choices to build a portfolio that is best suited for your individual circumstances.Steve Conard is a Certified Financial Planner™ professional with Compass Financial Services, a registered investment advisor with offices in West Des Moines and Adel. Securities offered through LPL Financial, member FINRA/SIPC.