New ideas for your retirement tool kit:
I’ve contributed to the same mutual funds for a while. Should I make a change?
When you first started your portfolio, you probably had some basic target allocations—say, 70 percent stocks and 30 percent bonds. But as market conditions changed and some funds did better than others, the percentages in your portfolio probably changed, too. So you should check in every year, to see if you should rebalance your portfolio. If it’s been a few years, the investment world has evolved, with the growth of passively managed funds, ETF (exchange-traded funds), and so-called robo-advisers. So there may be new tools you can add to your arsenal. Also, remember that it’s not just the market that changes every year; you change as well. Especially as you edge toward retirement, your risk tolerance may decline. And it’s important to see if you’re still on track to meet your goals.
Are index funds cheaper?
The amount of money invested in passively managed funds recently hit $4.27 trillion, for the first time eclipsing funds run by professional stock pickers. Instead of choosing individual stocks, these funds—also known as index funds, because they invest in all the shares in a market index such as the S&P 500—try to match the performance of the market as a whole. If your money has been in actively managed funds for a while, it’s worth giving index funds a look. In general, their fees are lower than those charged by actively managed funds, and after costs, they have outperformed most of their actively managed peers. There’s one exception to that trend: bond funds. The performance of passive bond funds has slightly trailed that of active managers, who seem to have been better at predicting changes in volatile interest rates.
Should I look more closely at ETFs?
Definitely, if you haven’t already. ETFs have been around since the 1990s, but they’ve really taken off over the past few years. An ETF is a basket of investments, usually tracking a broad market index or built on a certain theme. One ETF might focus on certain technology companies, for example, and another on large-cap multinationals. Unlike mutual funds, ETFs can be freely traded, in a matter of minutes, through any brokerage. ETFs also have no fees to buy or sell, a major advantage over some mutual funds. (Fortunately, the advent of “no-load” mutual funds has largely eliminated many of the excessive mutual fund fees of the past.) Just be careful with ETFs targeting narrow niches; there are now some devoted to robotics, cybersecurity, drones—even marijuana production. A number of these have substantial risk, and they can diverge from the broader market.
What about target date funds?
If you have a 401(k), there’s a good chance you’re familiar with target date funds. They’re commonly the default choice for these retirement plans, and your company may already have auto-enrolled you in one. They are often thought of as “set it and forget it” investment vehicles, because they automatically rebalance your portfolio as you approach your target retirement date. However, since the fund itself is often investing in other funds, they come with higher fees. You’ll typically pay 0.5 percent more a year over the cost of passively managed funds, and those costs add up. Target date funds also tend to be quite conservative in their investments, even at the start, meaning that they might be too heavily weighted with bonds during a time of ultralow interest rates. Especially if you’re young, it’s worth checking out what target date funds you might be invested in, and you may think about changing your default investment options.
Can I consider socially responsible options?
For many years, the assumption was that you had to turn off your conscience when looking to make money in the markets. That is no longer the case. In fact, the opposite might be true in some cases, particularly when it comes to long-term growth. In recent years, many investors have become aware of options for socially responsible, or impact, investing. It goes under a lot of different names; one is ESG investing, which stands for Environmental, Social, and Governance. Such terms can apply to a broad range of approaches—everything from investing in companies determined to improve the environment to filtering out arms manufacturers, say, or companies that sell alcohol or tobacco products. It’s a field that has grown dramatically over the past decade.
Are there new technologies I should look at?
Yes: Robo-advising. It sounds alarming—and to some old-school financial advisers, it sort of is—but really, the sophistication of financial technology products has gotten to the point where an automated, algorithm-based digital platform can offer many of the same services as a traditional, carbon-based adviser, at a fraction of the cost. These new digital tools can offer guidance based on highly specific metrics, such as your investment goals or your risk tolerance. They can automatically perform tasks such as rebalancing your portfolio and “tax-loss harvesting” (selling money-losing investments at the end of the year to reduce your taxes) and give you advice tailored to your mix of assets and financial circumstances. There are robo-advisers built around apps, and all the major brokerages now offer a robo-product. Not only can they save you money on fees versus a traditional financial adviser but they also don’t discriminate based on assets, whereas many human advisers, for understandable reasons, require you to have anywhere between $100,000 and $250,000 before they will take you on as a client. ■