The Best 401-K Investment Options for 2014 and 2015

Wouldn’t it be nice to know that you were in the best investment options available to you in your 401-k and that these were the best mutual funds for 2014, 2015 and beyond? Sure it would, and you might think that you already hold the best mutual funds: Target Retirement Funds. They take care of asset allocation for you and have become very popular, but they may not be the best investment options for all of your money.

Most of the investment options in the average 401-k plan are mutual funds and most people want to keep it simple when they invest for retirement. If simplicity is your only concern, these target funds are the best mutual funds for you and are the best investment options in your 401-k. On the other hand, they may be much riskier than you think in 2014, 2015, and beyond due to the asset allocation they offer. Let’s look at an example of how they work.

Torie is 30-something and would like to retire in about the year 2040. To keep things simple, a Target 2040 fund is obviously one of the best investment options in her 401-k because it has an asset allocation designed for her. She figures that it should be one of the best funds available because the asset allocation automatically changes and becomes more conservative as her retirement nears. It looks like a one decision deal for all of her 401-k money, since it maintains a balanced portfolio of both stocks and bonds (actually stock funds and bond funds).

Target funds vary in asset allocation formulas from company to company, and some are more aggressive (more into stocks) than others. That can be a problem for investors like Torie because they would like some of their money invested someplace safe. In other words, a target fund might be one of the best investment options and one of the best mutual funds for her… but not for all of her money. With the Target 2040 option she has in her plan, the asset allocation has her heavily invested in stocks for the next ten years or so… with the rest going into bonds.

Neither stocks nor bonds are safe options, especially for 2014, 2015 and beyond. Stocks and stock funds have been the best investment options for the past five years and may be running out of steam. Bond funds have been favored by millions of investors as the best mutual funds for more than 30 years – because they have been good steady performers. This could change in the relatively near future if interest rates go up. When rates go up they will LOSE money.

What can you and Torie (my daughter) do for greater peace of mind? For Torie it’s a simple solution because her 401-k has two safe options. The stable account option is one of the best investment options available anywhere for safety, since it pays the highest interest rate around. Second, she has a money market fund as one of her investment options. When it comes to safety, these are by far the best mutual funds. Solution: change your 401-k asset allocation so that half of your money is allocated to the appropriate target fund with the other half invested for safety.

Set things up so that your asset allocation is 50-50 for your new contributions as well as for your exiting investment portfolio in your plan. This way you don’t need to worry about the economy, interest rates, or the stock market. If a money market fund is your only or best investment option in the safety department, go with it. It will pay a higher return as interest rates go up.

Target funds can be the simplest and some of the best investment options for 401-k investors. They can be the best mutual funds for IRA investors as well. Just don’t put all of your money there for 2014, 2015 and beyond if you want a safety cushion. Mellow your asset allocation and cut your risk by adding some safe investment options to your portfolio.

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