The theme for this week is how to pick the right investments in your 401k plan. So far this week, we’ve talked about target date funds and when you may want to customize your 401k investment strategy, and today I want to continue with a 3rd investment strategy option that’s available in many 401k plans - the model portfolio.

Model portfolios are usually designed around the amount of risk you’re comfortable taking. Usually you answer a few questions and then a recommendation is made for a model strategy that you can pick from - across the spectrum of conservative, moderate, and aggressive.

It’s a bit more customized than the target date funds, and yet you’re not completely on your own when it comes to picking funds and designing your investment strategy. So in theory, it’s a great approach to investing in your 401k, but I have a couple words of caution if you go with the model portfolio option in your 401k:

First of all, we all like to think we know ourselves well, but most of us aren’t very self-aware, especially when it comes to knowing our temperaments when it comes to investing. Younger people should be in aggressive model portfolios, but if you answer the questions a certain way, you might be recommended the conservative portfolio, which is a terrible choice for the younger person who is 30+ years from retirement. So know thyself well if you go with this approach.

The other point of caution with selecting a model portfolio is that you can’t set it and forget it. Many people (maybe most people - at least in my experience) pick funds when they sign up for the 401k plan and never bother to make any changes, ever again. If you pick a model portfolio, and you work at the same place for 10 or 20 years and never adjust the portfolio that you’re invested in, that could lead to a lot more risk than you should be taking with your investments. So when you pick a model portfolio, be sure to still review your 401k at least annually and decide if you need to adjust which model you’re in as you get closer to retirement.

That’s it for today. Thanks for listening.

My name is Ashley Micciche and this is the One Minute Retirement Tip.

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