Estimated reading time: 9 minutes
Do you know how hard your money worked for you last year? Evaluating your retirement accounts will help you see precisely how your money performed. If it sounds like a hassle, don’t worry — you can assess your retirement account performance in just 15 minutes!
At least annually, you need to check the performance of your retirement accounts. Most quarterly statements are available online, so you can regularly take a peek. But I find autumn is the best time of year for a full check-in on those accounts.
Why autumn? Well, many companies offer open enrollment in retirement programs during October. It’s also a good time for evaluating your retirement account because your existing funds have had plenty of time to perform throughout the spring and summer months. Better still, evaluating your retirement account in October allows you to adjust before the end-of-year chaos ensues.
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If you’re ready to see how your retirement accounts are performing, here’s how to do a 15-minute evaluation.
Step 1: Check Fund Performance
Believe it or not, we are at the mid-point of the year (I know, I can’t believe it either). That means it’s a great time to at least start thinking about evaluating your retirement account. While autumn is my preferred time to assess performance. It’s not a bad idea to do a second evaluation in the spring as well.
Most statements are available online, at least quarterly, so checking your account is a simple matter of logging on. I find many people aren’t so sure what they’re checking (or the thought of checking their retirement account makes them nervous — maybe even a little nauseous), so they put it off.
One important note, if you haven’t logged on before or it’s been a while, this process may take longer than 15 minutes. But as you familiarize yourself and continue to build your skills, you’ll be able to evaluate your retirement fund performance quickly and easily.
Having access to reports online means checking your fund performance is so much easier these days. In the past, we’d wait for our targeted investment accounts to arrive in the mail, check it against stock performance in the news, and then spend time making phone calls. Now, by logging on to your account, you see your day-to-day balance and get access to all the reports you need immediately.
So especially if it’s been a while since you logged on (or you’ve never logged on at all), there’s no time like the present for evaluating retirement fund performance.
Step 2: Compare Performance Against Benchmarks
Consider looking at the following benchmarks to check on fund performance:
- For large-cap stocks, compare with the S&P 500 index.
- If you have small-cap stocks, look at the Russell 2000 index.
- Benchmark tech stocks against the NASDAQ.
Do you need help determining large and small-cap funds? My post on Mutual Fund Mistakes will give you all the guidelines you need to determine which block your funds fit into.
When you’re checking your fund performance, you’ll want to look at the benchmarks and think of it as a pyramid. The base of the pyramid is your most conservative funds—the more substantial, blue-chip companies. Then, you’ll move up the tier to more balanced funds. At the top are the high-risk aggressive investments such as international and emerging market funds. This is also where you’re more-than-likely swinging from the literal vine when it comes to your risk tolerance. I like to use the image of a pyramid to determine the difference between small, mid, and large-cap stocks, etc. as it creates a visual that’s easy to understand.
Step 3: Compare to Companies
When evaluating your retirement funds, it’s also good practice to use companies as comparisons for setting benchmarks. Fidelity, American Funds, and even Vanguard will offer comparisons of large-cap, mid-cap, and small-cap funds, etc. These companies break down the rate of return — which is a profit on an investment over a period of time. What makes this so great (at least, for us numbers geeks) is these numbers go deep.
Now, a word of caution. You can get as involved in the process as you like, but I recommend you refrain from becoming a little too hands-on. Comparing individual funds becomes overwhelming quickly. Trading them too often doesn’t give them time to grow and recover. The smart way to use a benchmark is to say, “Okay, this is considered a large-cap stock. How did other large-cap stocks in this similar type of fund family perform?”
Look at your current investments and compare their performance. If you discover that they’re underperforming, you may want to rebalance your portfolio. Similarly (and this is where it gets tricky, so consult with a trusted advisor), if you find your funds are overperforming, you may also want to rebalance. Don’t make a mistake by relying on consistent overperformance.
For example, let’s say you find you’re on the top-heavy side with a few funds doing very well in one particular area. You may want to take the gain and rebalance it in another underperforming area.
People often follow the misconception that buying a “hot stock” when it’s “up” is a good idea — it’s not. You wouldn’t want to buy coffee when the demand was high, because you’d be buying the coffee at its increased price. You’d wait until the coffee was on sale. You’d find that it’s a bargain and you would want to buy more of what’s on sale. Think of stocks the same way. You don’t want to buy them when they’re elevated.
While you don’t want to buy crashing stocks either, of course, you can wisely invest in underperformers to ensure the balance ebbs and flows. Don’t get too bogged down in the nitty-gritty details of making micro-adjustments. Keep the big picture in mind, and simply look at how your overall funds compare to other fund families.
There’s not a specific number you should look for, either. Just think of it as an overall comparison, where similar investments should perform at similar levels.
Step 4: Review the Fees You’re Being Charged
After looking at fund performance and comparing your funds against other benchmarks, you’ll want to review the fees.
I find fees are one area people often overlook and ignore. You may not even realize they’re there, but don’t gloss over them. These fees can have a significant effect on the long-term return of your investment.
If you need help understanding the fees while evaluating your retirement accounts, visit my post on Mutual Fund Fees Explained and Decoded. I’ll outline which fees to look at, how to assess if the charges are reasonable, and how they will affect the long term performance of your funds. You shouldn’t turn a blind eye to the fees or shrug them off.
Because there are thousands of low-cost options available, there’s no reason you should see more than 1% in fees per fund. The higher the percentage, there’s an increased chance it can have a long-term adverse effect on your overall fund performance.
When you look at the fees, go in armed with accurate information. Research the reason and normal levels for each fee to ensure you’re not over-paying. This background research will give you a good idea of what you’re looking for and how to rebalance to an investment that’s less costly. While some fees are a necessary part of life, you’ll want to avoid getting overcharged because you weren’t paying attention.
The Big Question of Evaluating Retirement Funds: Should I Rebalance?
After evaluating retirement accounts and comparing them against benchmarks, you may decide to rebalance your overall portfolio. Because none of us has a crystal ball (I wish!), we can’t predict the future of our investments. It is common for funds to underperform and even overperform due to market shifts and external factors beyond our control.
If you did exceptionally well in one particular investment last year, it could be a sign that investment could be weighted too heavily. It sounds counterintuitive, but don’t get dazzled by high performance. When you see you’re killing it in one area, it becomes tempting to throw all your investments into that particular “hot” fund — don’t.
However, putting all your eggs in one basket, so to speak, isn’t a smart move either. As I’ve seen many times, one bad day in the market may quickly wipe out any gains you’ve experienced, all because you weren’t properly diversified. Similarly, one good day is often all you need to reverse an unfortunate trend.
It’s so important to set up a balance of investments that feels comfortable to you. You don’t want to be too conservative and end up short on retirement funds (if you’re worried, check out this post: Is Your Risk Tolerance Holding You Back). At the same time, you don’t want to put it all out there and find out you’ve gone “all in” on a bad bet. It’s essential to diversify and do an annual review of your entire investment portfolio.
As you get older, you’ll also find that your risk tolerance has changed. When you’re first starting out in the workforce, it makes sense to invest heavily in stocks. If your investments underperform or even tank, you’ve got time to bounce back. But when you’re older, this aggressive approach may be a little too risky. As time marches on, be sure to adjust accordingly as you get closer to retirement age.
The bottom line is that evaluating your retirement portfolio is an essential annual activity. You should rebalance once or twice every year (not too often, but frequently enough to adjust for significant changes). Add this to your autumn calendar, as this is the perfect time for evaluation. (Go the extra mile and put it on your spring calendar as well.)
Follow the easy steps above. The first time around, evaluating your retirement funds may take more than 15-minutes. Once you get through your evaluation the first time, it will become even more comfortable next year; as the evaluation process almost goes on autopilot. Annual statements will show you your historical performance and return on investment (ROI). Check them, compare them to benchmarks, and adjust.
You will feel more confident and secure going into the winter months and next year knowing your investments are in the right place.
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