The Most Common Investing Mistake-Not Knowing What's in Your 401(K)

By in Bond, Investing, Retirement, Stocks | 14 comments

“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:

investment accounts

Basket=Account                  Fruit=Investments

 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?

IRA Account Positions

IRA Account Positions

 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.

6.61% is in cash.

Review

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.

Action Step

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

    14 Comments

  1. This is a very resourceful post, thanks for sharing Barbara. I must confess I was unaware about my own pensions until I started to look under the hood and was fascinated. For anyone who has an IRA it’s really important to review the investments within the IRA, your analogy is great and I’m sure it will help investors who are just starting off. Great post, thanks for sharing.

    shobir | Find Some Money

    December 16, 2013

  2. The fruitbasket analogy is just brilliant Barb! Very nice post! Even a simple question like this trips the uninformed investor.

    Moneycone

    December 16, 2013

  3. @Shobir-Thanks for sharing your own pension experience. You are not alone in a lack of understanding about what investments are in one’s retirement account!
    @Moneycone-Brilliant? Can I quote you? Thanks for the props!

    Barbara Friedberg

    December 16, 2013

  4. I have to agree with you Barbara, many of my bank clients have NO IDEA what they are invested in! But the DO know they have an IRA and 401k.

    One of the most common mistakes I see are clients that come “open an IRA” but hold nothing but a savings account yielding .05%.

    DOH!

    Tortoise Banker

    December 16, 2013

    • Hi Tortoise,

      I understand that investing is not “fun” for most. Yet, understanding what you own doesn’t take too much time and ensures that your money is where you want it to be.

      Barbara Friedberg

      December 16, 2013

  5. I use Morningstar’s Portfolio X-Ray to understand not only what funds are in my portfolio, but what holdings are in the funds. For instance, I can say that my wife and I hold a large amount of Vanguard’s Total Stock Market (TSM) fund in a taxable account, but what is in TSM? Portfolio X-ray shows it is a large-cap fund that closely matches the Russell 1000 index. A Morningstar style box of TSM looks like

    23, 26, 24
    6, 6, 7
    3, 3, 3

    Portfolio X-ray of all of our equities in all accounts gives a Morningstar style box for our portfolio of

    18, 19, 18
    10, 9, 5
    10, 8, 3

    Bryce @ Save and Conquer

    December 17, 2013

  6. One can make all the right decisions to set aside a % of income for retirement, but then put the money in the wrong investments if no attention is paid to it. The awareness of where hard-earned money is actually invested is vital if people want to earn a good rate of return and manage risks effectively.

    Squirrelers

    December 17, 2013

  7. @Bryce- I’m so glad you mentioned the Free Morningstar Portfolio x ray tool http://portfolio.morningstar.com/Rtport/Free/InstantXRayDEntry.aspx. It is a great resource to help the investor understand what she/he’s invested in. Looks like you are nicely diversified with small, med, and large cap holdings covering value, growth, and balanced approaches.
    @Squirrelers, Your comment reminds me of a friend who is approaching retirement and only invested in CD’s her entire life. By not dipping into stocks or bonds, she shortchanged her net worth!

    Barbara Friedberg

    December 17, 2013

  8. Great Analogy Barbara, so many people rely on their employer or a “financial advisor” to direct their investments, but often times these entities have a conflicting interest. Even if you have a 401k, I believe you can have a individual retirement account IRA, which would be a good thing!

    Jim

    December 20, 2013

  9. @Jim,If you are below certain income thresholds, you may contribute to an IRA in addition to a workplace retirement account. It’s a superb way to build lifetime wealth and have your money grow tax deferred.

    Barbara Friedberg

    December 20, 2013

  10. @Jim,If you are below certain income thresholds, you may contribute to an IRA in addition to a workplace retirement account. It’s a superb way to build lifetime wealth and have your money grow tax deferred.

    Barbara Friedberg

    December 20, 2013

  11. I use Vanguard’s Portfolio Watch which analyses my holdings and compares it to the overall market as well as my benchmark allocation. I am well diversified within my Vanguard holdings but I am concerned that I have similar individual holdings across several investment accounts. I am trying to get my employer to add Vanguard as an option for our retirement account so I can consolidate my funds.

    Paul @ The Frugal Toad

    December 20, 2013

  12. Paul, Sounds like you are very much on top of your financial assets. Good luck getting your company to add VAnuguard to its options. YOu have a challenge with that one.

    Barbara Friedberg

    December 21, 2013

  13. It is essential for the potential investor to educate oneself about their financial opportunities despite hiring a financial advisor. This practice will strengthen your own abilities to make better choices and to remain aware of your capital investments.

    Nic

    February 18, 2014

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