Get The Most Out Of Statement

Get The Most Out Of Statement

OCEAN CITY — Back in the markets’ worst days a few years ago, a lot of investors kept their 401(k) statements at arm’s length: out of sight and happily out of mind.

That approach might make some sense — in the short run — if you have trouble staying calm in the midst of a storm. But if it’s been a while since you checked your 401(k) statement, you should probably give it a good, thorough look.

For one thing, you might be in for a pleasant surprise. Key stock indexes are up sharply since the bull market began in March 2009. And even though markets haven’t hit their previous peaks, many 401(k) participants’ accounts are actually higher than ever — thanks to continued contributions through automatic paycheck deductions.

What’s more, a thorough review of your account from time to time is the only way to tell whether you’re still on track with your strategy or whether you’ve veered from your path.

Here are two tips to help you put your statement to good use.
1. Compare apples to apples.

Performance is probably the first thing investors look at with a statement. How’s my overall return? How much is my account—and my individual investments—up or down? But it’s important to put everything in context. When you’re studying your individual investments, beware of raw numbers, or of mixing apples and oranges. Instead, ask yourself these questions:

How has the fund performed against other funds with similar objectives?
What was the average performance for its category?

Benchmark indexes can offer a quick answer to those questions. An index is an indicator used to measure the performance of a composite group of securities considered to be representative of a specific market, industry or asset class. Most investment fund managers measure their performance against a specific benchmark.

Also, be sure to measure performance over time. Results over a single quarter, or even a year, might reflect a hot streak. Looking over a three-, five- or 10-year period will show you how the fund has done in different market conditions against its peers.

2. Do a (re-)balancing act.

The stock markets’ volatility over the past few years has reinforced the importance of an appropriate mix of stocks, bonds and cash for your age and investment goals. Diversification can be an effective way to help manage risk, though it can’t ensure a profit or protect against loss.

A challenge arises when performance varies between your investments — especially when one mutual fund or investment class is going strong while another is sluggish. If you had originally decided on a ratio of 60% stocks, 30% bonds and 10% cash equivalents, for instance, you might find yourself with a 70% stock, 25% bond and 5% cash equivalent allocation instead.

You may be reluctant to rebalance if you’re happy with your portfolio’s performance. But there was a reason you chose a particular allocation of investments in the first place. If different types of assets have grown at different rates, your portfolio may not continue to reflect your risk tolerance, goals and time horizon. For example, if your stock funds do very well one year and their share of your portfolio grows, you might suddenly have more risk than you planned for. Or perhaps bonds are doing well and stocks are underperforming. Your portfolio could then be more conservative than you had intended. In that case, you may not reach your goals within your time horizon.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)