 | You asked, and Dave has answered! Last month, you sent us some great investing questions. Dave picked a couple and answered them just like he does on the radio—as if he were in your shoes.
Question:
Millie says about 30% of her 401(k) is invested in her employer's company stock, and the rest is in a target fund. "Does this amount make good sense in terms of diversification?"
Dave:
I don't invest in single stocks—they're just too risky. And investing in the company you work for ties up your current income and future wealth in one company. Can you say, "Enron"?
If you're set on holding company stock, limit it to about 10% of your 401(k).
Your target funds are a better choice, but still not the best way to go. Target funds are usually a mix of stock and bond funds. They shift their holdings from more stocks to more bonds based on a target date, such as retirement. But their fees are high, and because they are a mix of investment types, they don't keep pace with the average growth of the stock market.
Instead, I choose to invest in mutual funds with a history of good returns. And I diversify by investing equally in four fund types: growth, growth and income, aggressive growth and international.
Question:
James' investments took hit in 2008, but he'd like to start investing again. He's heard a lot of predictions about another market crash and the U.S. going bankrupt. "Do you think the U.S. can pull out of all this mess?"
Dave:
Stock-market investing is often described as a roller coaster. Sometimes it's a really steep drop, and it's scary. But no one gets hurt on a roller coaster unless they jump off. You must be willing to ride the roller coaster down as well as up.
When the market dropped in 2008, I was one of many investors with a long-term view of the markets who didn't believe the world was coming to an end. But that kind of talk isn't exciting enough for television. TV "experts" play up the gloom and doom to get ratings. For example, how often do you hear about the fact that the S&P has basically doubled since its 2009 low? To be a successful investor, you can't let TV "experts" set your investing tone.
I'm not saying the U.S. doesn't have challenges to overcome. But that's been true throughout our history. So, knowing that, I invest with the idea that over a long period of time, good, profitable American companies are going to do well. You can do the same by investing in good growth-stock mutual funds.
Get Your Questions Answered
Even though Dave can't answer all your questions here, you can still get the same great advice from one of Dave's Endorsed Local Providers (ELPs). All of our ELPs are investing professionals who agree with Dave about the best way to save for retirement. Your ELP has the heart of a teacher and will answer your questions so you can make your own investing decisions. Get in touch with your ELP today!
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