Managing Your 401K at Work

The Board Room on the New York Stock Exchange

Most of you who work for a living have access to mutual funds in your company 401K program. My advice has always been and always will be, if they do not pay you matching funds then use an IRA to finance your retirement.  For people who have 401K programs, I offer some advice for your long term retirement strategy. Invest for yield, not for growth. In my opinion, the market that we are in has risk for people who are dependent on a growth investment portfolio.

                                                                      Portfolio Size

The search for yield has led some investors to dividend-oriented mutual funds. These mutual funds and exchange-traded funds (ETFs) invest in dividend paying securities.  According to Charles Schwab and Company, between March 2011 and March 2012, investors placed $25 billion into dividend paying funds and pulled out more than $136 billion from all other stock funds. The number of dividend funds has increased significantly in the past year, from 29 to 46. What happened is, low interest rates have reduced yield on a variety of traditional income sources. Another development, investors may be influenced by past performance.  Dividend paying stocks have outperformed non-dividend paying stocks in the Standard and Poor’s 500 Index – 19.1% versus 16.7% during all 10 bull markets since 1972 says Ned Davis Research. The third point, stocks that paid dividends suffered about half the losses as non-dividend payers in all the bear markets during that same time period says Ned Davis Research. Here is the reason why I have been in dividend and interest paying securities since 1972.

                                     Mutual Funds and Diversification

Your 401K and IRA investors who don’t know this information and do not read my blog on a regular bases, may want to reallocate your equity (stock and stock mutual funds) holdings to Interest-oriented and dividend-oriented mutual funds and securities.

Now let’s talk about the risk!

Equity Risk

These mutual fund investments are not bonds and carry volatility risk of stock investments. For example, DREYFUS HIGH YIELD STRATEGIES Fund (Symbol: DHF) had a 52 week high of $ 4.70  and a 52 week low of $ 3.96. At the recent price of $4.24, it yields 9.95%. Traders shifting from bonds to bond-oriented funds are altering their asset allocation and could be introducing more risk into their portfolio. For example, if you, the investor is planning on selling your recently bought fund shares in the near future and you paid over $4.50, you will take a loss on the investment. Income Funds are long term investments and should be used in your portfolio as such.

Tax Implications

Since 2003, dividends generally have been taxed at a 15% rate. Unless the President and Congress extend the Bush tax cut, the dividend tax rate for the highest earners may more than double after 2012. It may increase slightly for lower income earners if the dividend is outside their IRA or 401K. If inside your IRA or 401K, don't worry about it.

Past Performance

The past is not a guarantee of future performance. While dividend-paying mutual funds and bonds typically have outperformed the market over the long run, those investing now might not reap the same benefits.