5 toxic funds that can foul a 401k

Herbalist Dr MziziMkavu · 2010-03-26T23:20:30+00:00

These funds sound safe, but their philosophies all but guarantee they will not maximize your investments. Most everyone with a 401k has a limited suite of funds to pick from. That doesn't mean that you should settle for inferior results. You deserve a 401k that will provide the returns that allow you to retire comfortably without leaving you open to huge risks -- or the need to continue working into your 90s. The most common 401k mistakes I see are these: Getting boxed into index funds that barely match the market, let alone beat it. Buying into so-called target-date funds that, while designed to reduce risk as you approach retirement, increase the risk of anemic returns that will leave you shy of your goals. Investing in funds with multiple managers that are run by committee without a clear strategy. These missteps may not flush all your retirement funds down the drain, but they will severely limit the returns on your hard-earned 401k contributions. That could leave you with less money than you're planning on, forcing you into an austere retirement or a longer working life.With that in mind, here are five toxic funds to kick out of your 401k, because putting money into them violates at least one of the three criteria above. I've highlighted them in part because they are fairly widely held, but you can apply the criteria to any of the choices in your own 401k plan. Toxic fund No. 1: T. Rowe Price Retirement 2025 Fund As a rule, target date funds are a bad idea for your 401k. These all-in-one funds include gobs and gobs of stocks and bonds, giving you an over-diversified mash-up of investments while gradually reducing your allocations to stocks each year under the guise of lowering your risk and protecting your retirement. The fundamental flaw is that those folks who want to retire early -- or, God forbid, plan on living a long time after they quit working -- may not have enough cash to retire comfortably thanks to the overly cautious approach taken by these target funds. These funds faced a storm of criticism for weak and unpredictable results in the bear market -- read "Target date funds? Aim elsewhere" for more on that -- and things have gotten so bad that the Labor Department is said to be preparing an investor alert on target-date funds, for release this spring. T. Rowe Price Retirement 2025 (TRRHX) is a common 401k option right now. Because the fund's allocations are based on a retirement age of around 65, workers who are 45 to 55 might consider this a good choice. Remember, though, that while the fund has outperformed the broader market recently, during a period when just about any allocation to bonds or cash has helped performance, it will drastically dial down risk taking as the years go by. That means you can expect to underperform the market as the target date approaches. Take the T. Rowe Price Retirement 2010 (TRRAX) fund that is now in its most conservative years. Though it's up about 50% from the March 2009 lows, that's compared with a 70% gain in the S&P 500 Index ($INX). This sort of finish should hold true for all target funds, whatever the date, even if your target fund is from another provider -- for example, Vanguard Target Retirement 2025 (VTTVX). The bottom line is that these funds may keep pace with the market for a time but limp across the finish line. There are better ways to protect your portfolio. Toxic fund No. 2: Vanguard Explorer I always tell investors that when you decide where to allocate your 401k cash, you're buying the manager as much as the fund. That's because the same stated strategy can have very different results, depending on who is running your fund. As I like to say, it's the person pulling the trigger on the buys and sells that makes the difference.For this reason, multimanager funds are bad options for your retirement cash. With too many cooks in the kitchen, these funds can often be a mishmash of ideas without a clear strategy or a clear goal to grow your retirement funds. Vanguard Explorer (VEXPX), boasting seven managers, is a good example of this. Each manager runs a different slice of the fund, so there's no overall portfolio direction. Vanguard Explorer's portfolio contains more stocks than Vanguard's small-cap growth index fund. What's that about? With seven cooks in the kitchen, this is one of the worst examples of multimanaged mayhem. Though VEXPX has managed to perform slightly better than the market during the past six months, tallying returns of about 20% (less disbursements) compared with about 15% by the Dow Jones Industrial Average ($INDU) since Sept. 1, it's underperformed your basic small-cap growth index fund significantly over the long term. The Explorer fund is essentially flat since its previous peak in 2000, while the Vanguard Small Cap Value Index (VISVX) is up about 130%. As the market is becoming more selective, the muddled strategy of VEXPX is way off target. Continued: An index fund loser More from MSN Money and Investopedia Buffett may be your best investment 7 more Vanguard losers to sell 3 simple, stellar expert portfolios The secret to finding the best Vanguard funds 5 top Fidelity funds for your 401k Dividend stocks to own now 1 | 2 | next > http://articles.moneycentral.msn.com/Investing/MutualFunds/5-toxic-funds-that-can-foul-a-401k.aspx?GT1=33002

Thread starter Herbalist Dr MziziMkavu
Start date Mar 27, 2010

Herbalist Dr MziziMkavu

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5 toxic funds that can foul a 401k

Herbalist Dr MziziMkavu

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