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Outside the Box
Dec. 3, 2010, 12:01 a.m. EST
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By Jeff Reeves
ROCKVILLE, Md. (MarketWatch) "” As we approach the end of the year, many 401(k) investors are getting ready to do some housekeeping with their mutual fund portfolio.
Thanks to a volatile 2010 for Wall Street, the results on 401(k) statements could be vastly different from investor to investor "” and may even prompt a desire to change strategy in 2011.
But before you dump your holdings due to losses or double down in a successful mutual fund with hopes of bigger gains, investors should take care to avoid some of the most common mistakes with their portfolios. Bad moves made now are compounded over time as you save for your retirement decades down the road via mutual funds and your 401(k).
Josh Brown, thereformedbroker.com and WSJ Financial Adviser blogger, says small business owners may be feeling better about the economy.
So before you make a change in your mutual fund portfolio that you may regret, keep in mind these seven deadly sins of 401(k) investing.
It's fine to have a favorite mutual fund, but just make sure that your affection for the investment is rooted in reality. Too often, investors will look at past returns or untapped potential as a reason to fall in love with a fund "” even when quarterly statements tell a very different story.
Take one of the flagship mutual funds, Fidelity Magellan /quotes/comstock/10r!fmagx (FMAGX 70.41, +1.13, +1.63%) . From early 2003 to early 2006, investors were rewarded with eye-popping returns of almost 50%, and assets under management were cruising at around $50 billion. The fund was popular and highly profitable, and co-workers could pat each other on the back for this choosing this great fund that was so good to them.
Except Magellan's gains in that window essentially tracked the major indexes. And over the last five years as the bull market has faded, the fund is off 37% while the major indexes are flat. What's more, for two separate periods in 2009, FMAGX had Morningstar's worst rating of just one star.
Breaking up is hard to do "” but sometimes, it's for the best. Don't let lust cloud your judgment and erode your 401k's value. Read InvestorPlace's "6 Stocks That Could Double in 2010."
Let's get one thing straight. Mutual funds, by their nature, are inherently diversified. While it's true that there are various flavors of funds and that you can get burned if you put all your eggs in one basket, there is rarely ever a call for an investor to hold more than a handful of funds in his or her IRA.
Take a fund like the Vanguard Total Stock Market Index /quotes/comstock/10r!vtsmx (VTSMX 30.72, +0.38, +1.25%) . The fund puts nearly all of its assets in individual stocks, save for a little cash as trades are executed. As of this writing the top position is Exxon Mobil /quotes/comstock/13*!xom/quotes/nls/xom (XOM 71.13, -0.35, -0.49%) with a whopping 2.5% of assets. That's hardly a majority position. As a result, the fund consists of some 50 stocks "” and chances are that at least a few of those same companies will appear in any other blue-chip mutual fund you choose.
That is not to say there's anything wrong with making a play on a specific sector or a specific strategy. But don't fool yourself into thinking that a higher number of funds is always better. You could in fact just be bleeding cash in fees without boosting your diversification at all.
In any type of investing "” be it stocks, options or mutual funds "” it's easy to get caught up in the thrill of a winner and to keep pushing for more. But this isn't a game, it's your retirement. And as such you should make a clear line between what is necessary for your nest egg and what would be nice to have if things go your way.
Goldman Sachs Group Inc. is brushing up on its Shakespeare. It's heeding the advice of Polonius to Laertes: neither a borrower nor lender be.
10:10 a.m. Today10:10 a.m. Dec. 3, 2010
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