A client asked me to look over his 401(k) portfolio. He was quite disturbed over the losses in his account. He agreed to pay me my hourly rate for one hour just to look it over and give him my thoughts on the matter. I agreed since it was a small amount of money with just a few holdings that I helped him put together years ago. I want to share with you my mental dialogue as I go through his statement. For privacy reasons, I can’t share screenshots so follow me on this journey.
First of all I notice that the statement covers the period of 3 months. This is not a lot of time to judge your mutual fund performance in your 401(k) plan. Let’s dig deeper. He has three mutual funds that are stock funds and one bond fund. This makes sense since the client is younger and is targeting growth in his portfolio. His stock funds are made up of a mid-cap fund, a small cap fund, and an international fund. This looks good to me. If he were more conservative, an older person, or less risk tolerant, I would have added more in a large cap value fund and less in the mid and small cap fund, but so far so good.
Let’s look at the mid-cap fund. It now represents 52% of his total 401(k) portfolio. Again I am not concerned because of the above. Now let’s look at the performance. When compared to the other mid-cap stock fund choices, it is the highest performer for the 1, 3, 5, and 10 year periods. The client was looking at the losses in the past 3 months and not looking at the big picture. This is a good fund that has performed well so it is a keeper.
The next fund is a small cap stock fund. He had only two choices in small cap stock funds and his unfortunately, had substantial losses in the past year (-17.87%). When I look deeper though, the fund had substantially higher positive returns over 3. 5, and 10 years compared to his only other choice. If it wasn’t so obvious that this was a fluke period of time, I would dig further into research to look for management turnover or policy changes or other parameters that might have affected this fund. Right now I would keep it but tag it for a possible switch in the future.
The next fund is an international fund. It had the least amount of losses (-8.43%) for one year compare to all of his other choices in that asset class. This fund also had positive 3, 5, and 10 returns which none of the other funds did. This one bad year does not justify him switching to another fund.
That next fund is a bond fund. This fund makes up only 4.5% of his 401K portfolio and is his most conservative fund but that doesn’t mean it can’t go down in value. This fund had a great year (+10.24%) and has consistently positive returns over 3, 5, and 10 year periods. It also happened to have the highest returns over those periods too compared to his other choices. It is a keeper.
My findings are that the big loss (-17.87%) in one category (small cap) over one year has dragged down his 401K balance. But his portfolio picks overall are sound. You aren’t going to get all positives all of the time. You have to keep a long term outlook. No need for a switch yet.
As you can see, focusing on the short term periods on your 401K statement can lead you to a lot of unnecessary worry. This client had an overall bad quarter and he may even have a bad year, but his portfolio is appropriate for his goals, risk tolerance and is well diversified. He is a do-it yourselfer who with my help has put together and managed this 401(k) plan by himself and he is doing a great job.