| Sargent & Lundy Savings Investment Plan |
| EVEN SHREWD INVESTORS MAKE THESE MISTAKES |
The following excerpts are from an article in the February 1998 issue of "Moneysworth" newsletter. The opinions of the author, Julie Jason, may or may not reflect those of the SIP Committee. Too many people who contribute to 401(k) plans through work make mistakes that compromise the full earning potential of their savings. Mistake: Reallocating your assets based on today's news. Last fall's stock market correction sent many investors to their phones to change their 401(k) plan asset allocations. In the wake of the turmoil in Asia, many people shifted all of their money out of international stock funds for fear that their portfolios would be dragged down in the next correction. Trap: Few people who pulled out of international funds bothered to check where exactly those assets were invested. Had they checked, they might have discovered that most of their foreign funds' assets were invested in other parts of the world where returns have been solid. International holdings should not make up more than 15% of a 401(k) portfolio, and its assets should be spread around the world, not concentrated in any one region. To be a successful long-term investor, you need to come up with an ideal asset allocation based on your age and then stick with that allocation through market ups and downs. You also need to know where each of your funds is invested. Mistake: Assuming that your funds are using the same strategy they did when you first invested. The rapid rise in the stock market over the past few years has turned small-capitalization stock funds into mid-cap stock funds...and mid-cap stock funds into large-cap stock funds. Background: Fund managers have been swamped with cash and have had to invest it. They haven't always been able to find the same types of stocks in which to invest, so they've invested part of those assets in securities outside of the ones they typically buy. In other cases, small-cap stocks bought by fund managers many months ago have grown rapidly to become large-cap stocks. As long as these stocks continue to have favorable earnings forecasts, most fund managers will continue to hold them. The problem for investors is that many funds in their personal mix may be overlapping and not providing them with the appropriate diversity. Helpful: Make sure your portfolio still has a wide range of investment classes from which to choose. Otherwise consider other funds in your 401(k) - or invest outside of your plan to create the appropriate diversity. Mistake: Not participating in your 401(k) because you don't want your paycheck reduced. A 401(k) plan is a salary-reduction plan, not a paycheck-reduction plan. Money that is diverted into your 401(k) comes from pretax dollars, not after-tax income, and the impact on your paycheck is quite small. Mistake: Savings for age 65 rather than age 90. Your investment horizon is not just the time you spend working - but rather your entire lifetime. Implications of investing for such a long time horizon... * You can afford to be very aggressive with your investments, concen- trating entirely on stock funds as long as you remember to rebalance your holdings before retirement. * You can gradually become more conservative from your mid-50s on, putting new contributions into less risky funds. * You can hold on to the stock fund investments you made with your earlier contributions, and wait until your late 60s before you convert them into bonds. By consistently reinvesting dividends in the stock funds you purchased and have held for decades, you should enter retirement with a very substantial nest egg. |
This page updated on 3/10/98