The Most Common Investing Mistake-Not Knowing What's in Your 401(K)
“What type of investments do you own?”
When discussing investing, I ask others this question all of the time.
Here’s the response I usually get to this question:
“I have a Roth IRA and/or a workplace retirement account”
What’s wrong with this answer?
A retirement account is not an investment. A Roth IRA, a traditional IRA, a 401(k), a 403(b) are all types of accounts.
These accounts hold your financial assets; your stocks, bonds, mutual funds, ETFs etc.
The investment account is similar to a basket.
Here’s a visual:
Basket = Investment Account
Think of your investment accounts as baskets.
Your TIAA CREF workplace retirement account is like a basket that you fill with individual financial assets. Or maybe your retirement 401(k) is run by Charles Schwab or another investment company. These are not your investments. These companies administer (or hold, like a basket) your various investment accounts; which hold your financial assets.
The basket might be categorized as a cloth basket or a straw basket.
Similarly, your retirement account might be a Roth IRA or a 401(k)).
Each basket has differing qualities, just like each account has varying characteristics.
Fruit = Financial Assets
Think of the specific investments; the funds, stocks, bonds, etc. as the fruit in the basket.
You need a basket or an account. This account might be a retirement account, an investment account, or a trust account. There are many different types of accounts. But the type of account does not specify the type of investment in the account.
The fruits in the basket, are similar to the individual positions or holdings of the financial assets in the account.
Here’s the Answer to the Question; What’s in Your Retirement Account?
Click on the picture for a better view.
This is a real picture of one of my retirement accounts.
Here’s the answer to the question; “What’s in your Schwab IRA?
There are three positions in my Schwab traditional IRA account:
76.56% is in The Vanguard FTSE Emerging Markets ETF (VWO).
16.83% is invested in an individual corporate bond.
What type of investments do you own?
The answer is not; an IRA.
The correct answer is:
In this IRA, the financial assets are an international stock index exchange traded fund, a corporate bond, and cash.
Investing Takeaway and Caution
To be a financially aware investor and consumer, know what you own. Understand your investments and the types of accounts.
For a really fun take on investing read the Free 20 Minute Guide to Investing.
Caution; I need to alert you that this account does not represent the entire Friedberg family portfolio, but just one slice of our investments. It’s important to look at all your investments and accounts as a whole and not in separate pieces.
Spend a few minutes a week understanding the investments you own.
If you’re not sure about the type of investment, feel free to write in for clarification.
Readers, what type of investment’s do you own?
image credit fruit bowl; google images_flickr creative commons