Choosing Mutual Funds for your 401k

Mutual Funds in your 401k

2008 was a very rough year for investors, mutual funds suffered significant losses for the year. Majority of mutual fund categories had negative returns in 2008, mutual funds lost between 40-50% in 2008, according to data released by Lipper Inc, a mutual fund tracking firm. Many investors already know this from their 401(k) account statements. The Standard & Poor’s 500 was down 40.88 percent while the Dow Jones industrials gave up about 36.16 percent. Don’t get me wrong Mutual funds are good investment instruments, and should be a part of 401k retirement accounts, but after such a tough year, investors must take stock and retool their 401k mutual fund portfolios, and if you are like most of us, this is a good time to take stock of which mutual funds should be included in your portfolio.

Some sectors did better than others, or put it another way, they lost less than others, for instance, Commodities funds’ negative return came up to 44.48 percent for the year while Global financial services funds returned negative 50.15 percent. Utility funds produced negative returns of 36.37 percent for the year. But as you can see, there are disparities in the percentages of the losses by sector. The only category that gained in 2008 is the so-called short-bias funds. These are the funds that make money during market declines. They actually gained 36.16 percent for the year.

The point here is that in choosing mutual funds for your 401k, it is important to construct a more balanced portfolio of stocks, one must note that most mutual funds take long positions. Such positions only make money when stocks gain in value, and loose when their value drops. There should be some place for short-biased stocks in your 401k stock portfolio, although it requires the expertise of knowledgeable portfolio managers, one must strive to maintain a more balanced 401k stock portfolio, by including stocks from different sectors, and well as those with different investment trading strategies such as the short biased funds as discussed.

A typical 401k stock mutual fund portfolio should consider including mutual funds such as Vanguard Prime cap fund, (lost only 31.9%), Fidelity Blue Chip Growth fund, American Funds American Mutual A, Vanguard Small Cap Growth Index, as well as Oakmark International. While these funds also lost money in 2008, their losses were considerately more moderate than many other funds, but consider the fact that 2009 may see some recovery from the battered stock markets. Many analysts believe that the markets have bottomed out when the Dow got to the range of 7,500. It has rebounded back and trading near the 8,900 range at the time of this writing.

Some of these funds may be closed to new investors, but the same managers also oversee other similar mutual fund portfolios. For instance the same managers who run Vanguard Prime Cap (may be closed to outside investors), also run Prime cap Odyssey Aggressive Growth, so while the Prime cap fund may be closed, one can invest in their Odyssey fund. Use this same strategy to invest with the best mutual fund managers whose prime funds may have been closed. This is a very vital point, which can enable you to select more balanced mutual funds for your 401k. Fidelity Blue Chip Growth fund, American Funds American Mutual A, is a very good fund, its losses for 2008 again was much lower than the average losses of both S&P 500, and the Dow Jones Industrial. American mutual gave up only 30.7%. They are very well managed mutual funds, one you should consider including it in their 401k plan.

In conclusion I like to stress again the importance of constructing your 401k-retirement portfolio with solid mutual funds, such as the examples I discussed. Mutual funds were battered in 2008, but they may come back in 2009, and a good diversified portfolio of mutual funds are good for your 401k, but one has to do their research before choosing the most suitable out of a wide range of mutual fund investment funds, across sectors, and investment strategies. I hope this article has helped in a small way.