January 25, 2010

2010 Investment Options for Your 403(b)

In early January 2009, I wrote:

"In 2002, the the S&P 500 lost 23.37%. At the beginning of 2003, the market continued to trend lower, and a funny thing happened, it turned around. By the end of the year, the S&P 500 had gained 26.39%.

I am not saying that 2009 will be a spectacular year and everything will be rosy, but if do your research and diversify your investments, you will at least be giving yourself a chance to participate."

If only I could predict the lottery numbers every week that well!

In the end, the S&P 500 gained 26.5% in 2009 which is almost exactly what it did in 2003. There are few similarities as to why the market turned around in 2003 and 2009, but it did.

Early in 2009, the market was just completely oversold. Everyone was so worried that every single company was going to go out of business that they quite literally sold everything (including bonds and preferred stocks). When the turnround came, it was strong.

Moving forward into 2010, it is definitely hard to see what areas of the market will stage the best performance, so since almost all of you seldom make changes to your portfolios, you must continue to diversify your portfolio - if nothing else, rebalance from last year!

Do not load up on international funds just because they had the best performance in 2009. International funds are somewhat more volatile because the international markets are more volatile, but there is also the currency trade which can help or hurt the fund's performance. If you wish to be more aggressive, adding a bit to your international holdings is a great way to accomplish this goal, but do not over do it!

On the bond side, just like in 2009, investment grade and inflation protected bonds (TIPS) look to be some of the best options. Government bonds should do poorly again in 2010 just like they did in 2009, and there is just about zero reason to be in them right now.

As I said last year, "As for the rest of the account, you really need to continue to research the funds that you have available. A good diversification model that would now include the investment grade and inflation protected bond funds would be excellent. Remember that if you only look at last year, you will be missing the point. Look at good and bad years, look at changes in the managers, etc."

If you look back through history, the second year of a recovery is generally not as spectacular as the first year, but it is usually still a good year. The goal here is to reap returns when we can and mitigate the losses in a bad year. Keep that in mind, and you will almost assuredly do better than those that try to time the market.

I wish everyone only the best in 2010, and I hope it is a very prosperous year for all of us!


Steve said...

If you do what you say you do, by looking out for the best interests of educators, then you would lead them to Vanguard and their index strategies. Why? low costs, broad diversification, no transaction costs, no commissions, long term growth, and the company with the most assets.

Robert (Robby) E. Schultz III, CFP®, ChFC®, CPWA® said...


Thank you for reading the blog and for your question.

First, Vanguard is a good company, but I will definitely not choose it as the sole "best" provider. Fidelity for instance also has a very robust and low cost plan that many Georgia school districts use and is at least as good as Vanguard. There are several other plans that are similar, but I have always thought that Fidelity and Vanguard are two of the best.

You must remember that the district chooses the 403(b) providers not the educators and certainly not me. It is best to go with the best option you have, but it is always better to contribute to something even if the options are not good.

Also, there are several studies about index strategies vs. active management. They both have their good and bad years. Active management outperformed indexes last year, but in some prior years it was reversed. Overall, I usually try to pick a mix because the indexes alone may miss something and vice versa.

Index funds are generally rated 3 star funds by Morningstar because they can lag behind some active managers at certain times. Part of what I do is to find the best funds (active or index) and use them for my clients.

As for looking out for the best interest of educators, I believe that my past posts speak for themselves. There are few things in my life that I have been more supportive of than the educators of this state and other states.

Thank you again for reading the blog and your question.

All the best,

Kirk said...

The Gwinnett County Board of Education has decided to limit the 403(b) providers to VALIC and Lincoln Financial. They have eliminated the best option Fidelity, who had by far the lowest fees. Do you have a recommendation between these two insurance companies? Which company has lower fees so that more of our paycheck contribution goes towards our retirement.


Robert (Robby) E. Schultz III, CFP®, ChFC®, CPWA® said...


Thanks for your question.

I was made aware of this change late last week, and I can honestly say I am surprised. VALIC may be revamping their company, but it has traditionally been a very expensive option for employees.

Gwinnett's letter stated - "Lower costs for plan participants" and "Elimination of fees such as surrender charges that may prevent an employee from controlling his/her account" which are two of the big issues. I hope that this is true, but I am very leery.

As soon as I find out some more information, I will pass it on.

Thanks again for your question.