There was a time when chicken coops were more common in backyards than gas grills and lawn chairs are today. Back then, people knew the original meaning of the term nest egg. To coax a hen to start laying eggs in the hen house, you simply placed an egg in her nesting box. Soon afterwards, more eggs would start accumulating.
Building up your retirement assets works in a similar way. The contributions you make to your retirement plan will add up and form a nest egg. Over time, your investment savings may generate earnings. If these earnings, in turn, generate more earnings, your 401(k) portfolio will enjoy the benefits of compound growth. However, standing idly by and expecting your investments to automatically earn money may be a big mistake. The trick is to continue to oversee your account after you make your initial investment choices. That means using the reports and other investment performance information your plan administrator gives you to track your account’s growth.
Understanding Investment Performance
The periodic performance reports you receive for your retirement plan can help you to manage your investments. The reports describe your fund’s performance over past intervals of time. It’s important to examine the fund’s returns over a one-year, five-year, and ten-year period. Then compare your results to a comparable market index of similar investments. But, keep in mind that indexes don’t have a fund’s operating expenses, and may therefore outperform your funds.
Remember to consider your contributions when you look at year-to-year figures. Comparing your current account balance with your balance from a year ago won’t show you the growth of your investments. Both your payday contributions and any investment returns build your balance. Be sure to figure out how much of your annual account balance increase is a result of your own contributions and how much is from your investment earnings.
Performance History
Although past performance is no guarantee of future results, historical returns can help you select a mix of funds that match your goals. For example, a fund’s long-term performance may indicate the amount of risk you’ll be taking on if you invest. The performance numbers may also show whether or not the fund’s manager was able to successfully invest the fund’s assets during market downturns.
Be aware that some funds may seem too good to be true. A fund’s impressive multi-year performance may be the result of a single extraordinarily successful year or perhaps the individual responsible for the fund’s top-notch performance is no longer managing the fund. Knowing what’s happening to your retirement plan investments can help you judge how well your funds are performing and whether your investments are meeting your individual goals.
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