MONEY 401(k)s

The Three Things Gen X’ers Should Be Doing In Their 401(k)s

Generation X woman in coffee shop on laptop
Make that a double-shot latte. Now's the time to focus. Tim Robberts—Getty Images

It's too early to give up and too late to delay. If ever there was a time to get your 401(k) in order, it's now.

The big things you have to get right in your 401(k) don’t vary by age: Pick a diversified mix of stock and bond funds. Keep costs as low as you can, using index funds if that’s an option. Don’t chase hot performance. But there is some advice that will matter more to you if you instantly know who’s a brain, an athlete, a basketcase, a princess, or a criminal.

1. It’s go time

Yes, you should ideally save a lot over your entire career. The truth is a lot people aren’t great about this in their 20s and early 30s. Young people have school debts to pay off and households to set up. And, let’s be honest, they have lots of free time to do fun stuff, but not such big paychecks to fund it. Maybe that sounds like you. (It certainly sounds like me.) The feeling that you are already behind can be paralyzing.

But here’s the thing: You still have time to make up lost ground. And you’ve entered your peak earning years. If you save a given percentage of your income today, that may be a bigger chunk of money than it was when your career was just getting going.

Source: Bureau of Labor Statistics

Let this be a spur to you as well. As you can see above, at your age, you likely don’t have any lifestyle-changing raises in your future. (Sorry.) There’s not going to be a better time than now to save money.

2. Think 17%

How much you really need to save for retirement at this point depends on how much you already have. But about 17% is a good mental anchor if you want to get your savings at least roughly right now and do the math later. The amount is far more than the average 401(k) contribution of around 6% or 7%. But take a deep breath. That number includes the contributions from your employer.

Where’s the number come from? Wade Pfau of the American College of Financial Services calculated the savings rate required to safely fund a typical retirement goal. About 17% is the number he came up with for people who start from scratch with no savings at age 35, with a 60% stock/40% bond portfolio. You might do okay saving less than that if stock and bond markets go your way, but Pfau’s number is what it takes to get there even with poor returns.

Don’t delay. Wait until 45 to start, and the from-scratch required safe savings rate goes to 36%.

3. Review your risk

For young savers, market risk can be a bit of an abstraction. The amount you saved by your early 30s is probably on the low side, so even a steep market slide means losing fairly modest pile of actual dollars.

Around age 40, though, the numbers involved change. The average retirement account, according to a survey by Fidelity, crosses over the psychologically important six-figure line. Big losses feel real.

Source: Fidelity Investments

So if you haven’t thought much about your portfolio lately, try this exercise. Figure out how much, in dollar terms, of your retirement accounts are in invested stocks. (If you have a fund, such as a target date fund, that combines stocks and bonds, be sure to include the stock portion of that fund in your total.) So imagine losing half those dollars. The S&P 500 fell by roughly 50% from top to bottom during the 2007-2009 crash, before rebounding. It could happen again. If you count up the possible losses and they feel like too much for you to stomach, meaning not just that you’d hate it but that you’d be tempted to sell, then trim back now.

That having been said, don’t be too afraid of market volatility. You have a lot of good earnings years ahead of you, and can likely bear some risk to get a better return.

MONEY Markets

Unlocking a safer, smarter portfolio

With a few tweaks to your portfolio, you can still hedge against the risks that really matter. Illustration: Daniel Stolle

Building in portfolio safeguards can be easy with these common-sense moves.

RORO has made a mess of a lot of carefully designed portfolios.

RORO isn’t what George Jetson’s dog used to say. It’s trader jargon for “risk on/risk off.” Investors pile into risky assets — especially stocks, both U.S. and foreign — when the economic news is bright, and run for cover into Treasuries at the first whiff of trouble.

Even if you’re a steady buy-and-holder, RORO has left its mark in two big ways:

First, diversification is harder. A classic way to reduce your volatility is to own different kinds of assets, so that when one part of the market falls, something else may be going up — or at least falling less. RORO wrecks that. It first roared in the 2008 crisis, when not just U.S. stocks but foreign stocks, high-yield bonds, real estate, commodities, and you-name-it all crashed.

The HSBC RORO index, which tracks how closely assets correlate, or move together, kept rising from there. It stayed near historic highs through late 2012.

The mood-swing trade has tailed off this year, but that’s because U.S. stocks boomed as Europe and emerging markets dragged. So spreading your bets with international stocks didn’t help you in the crisis and isn’t boosting your returns now.

In any case, it’s too early to declare an end to RORO, says HSBC strategist Mark McDonald. With the global economy still vulnerable to crisis, a raised eyebrow from Ben Bernanke or a European finance minister may be enough to set off an undiscriminating tizzy. “Any market hiccup can cause correlations to spike again,” says McDonald.

Second, safety is getting risky. One investment that has smoothed your ride is the safe haven everyone runs to at “risk on” time: Treasuries. They’re now so popular that the yield on a 10-year note is down to less than 1.8% (When bond prices rise, their yield falls.)

That creates some problems: Yields have little room to go anywhere but up from here, which means you could experience sharp losses when interest rates, and thus yields, start to rise again. What’s more, holding bonds at these rates means you risk seeing your investment’s value eroded by even a moderate amount of inflation.

How, then, in this twitchy environment, do you build a portfolio safe enough to let you sleep at night, with returns that get you to your goals? MONEY dove into the best research on diversification and talked to some of the sharpest advisers. The big takeaway: With only a few twists, you can still hedge against the risks that really matter.

What follows are five key ideas to guide a long-term investor through a market where everything turns on the latest news flash.


Forget the short-term, protect against generational risk

The idea that other countries’ markets will move out of step with the U.S. is an important part of the pitch for international mutual funds and ETFs. (“Diversification” is literally the first word on T. Rowe Price’s “International Investing Explained” web page.) This has become a harder case to make, however.

Consider the relationship between U.S. equities and an index of developed markets. A 100% correlation means markets always move together; zero is no relationship at all. Since the ’70s, correlations have shot up from 37% to 88%.

What happened? Globalization. “As the world becomes increasingly interconnected, macroeconomic events are more often driving market movements,” says Tyler Shumway of the University of Michigan business school. Companies in Europe or Asia do much of their business here, and vice versa.

Even the fact that you can easily diversify abroad with a mutual fund makes it harder, ironically, to reap the benefits of diversification. The anxieties of investors in Florida can feed through to stock prices in Frankfurt.

Step back from the short term, though, and diversification still looks powerful. William Bernstein, a Portland, Ore., investment adviser, says it protects against risks that play out over decades — like a slump long enough to blow out the gains of a generation of investors. That happened to Japanese investors after 1989.

To be blunt: Owning overseas is a hedge against the unlikely but real possibility that you’ll someday find yourself living in the next Japan. Research from AQR Capital Management shows that while countries often fall together in the short term, long slumps are something nations often do on their own.

In a decade in which Japan fell 40%, in fact, a global portfolio rose 130%. “Global exposure helps you cut out the risks of investing in a single country,” says Gregg Fisher of advisory firm Gerstein Fisher. And that includes your own country.

How to retool: Over five years foreign equities have lost an annualized 1.4%, vs. a 4.9% gain for the S&P 500. If disappointing performance led you to lighten up on foreign shares or to stay out, this year’s divergent markets may offer a window to get in. The stocks in Fidelity Spartan International FIDELITY CONCORD SPARTAN INTERNATIONAL IDX I FSIIX 0.166% look relatively inexpensive, trading at about 13 times next year’s expected earnings, compared with 14.3 for the S&P. “Smart investors go fishing in troubled waters,” says Bernstein.

How much do you want to own? A third of your stocks is a baseline. Though the short-term diversification benefits of going abroad have declined, they haven’t disappeared. A report by Vanguard found you get most of that advantage with a 30% allocation.

The same report also revealed something surprising: “Emerging markets are almost as correlated with the U.S. as is the rest of the developed world,” says Vanguard’s Christopher Philips. These riskier markets might be attractive for their return potential, but there’s no need to add a lot just to be diversified.

A broad international fund with around 15% in such countries, like MONEY 70 picks Dodge & Cox International Stock DODGE & COX FDS INTERNATIONAL STK FUNDS DODFX -0.1704% or Vanguard Total International Stock VANGUARD STAR FUND TOTAL INTL STOCK INDEX FD VGTSX 0.2291% gives you plenty of exposure.

Key Idea No. 2: Some stocks beat others


Markets may move in sync, but some stocks beat others

The demise of easy stock diversification (at least in the short run) means there’s one less obvious strategic edge available to individual investors. A bulwark against disaster is good — but is there any way to actually capture a better return along the way?

Research into the history of financial markets has found few strategies that offer a long-term advantage. Two that might: owning small-company and value stocks, or shares that trade at a deep discount to earnings or business value. Small-caps beat blue chips by an annualized two percentage points since 1927, according to Morningstar data; large value beat pricier large growth stocks by about as much. Stocks that are small and cheap won even bigger.

The idea of tilting your portfolio toward some corners of the market pushes against the idea of spreading yours bets as widely as possible.

However, Larry Swedroe of Buckingham Asset Management says you can use tilt as part of a strategy to lower your overall exposure to risky assets. He’s found that since 1970, a portfolio with 50% in bonds and the rest split evenly between an S&P 500 index fund and a U.S. portfolio of small value stocks would have matched the long-run return of a fund with all of its assets in the S&P, with less volatility.

Two big caveats: First, the future might not look like the past. Second, this approach takes guts, even with a bigger bond stake. The reason small caps deliver better performance is that they clearly are risky. And although value investing is often thought of as conservative, stocks are often cheap when the market sees trouble ahead.

Besides, when bull markets take hold and “go-go” growth stocks soar, being a value investor can make you feel like a chump. “Way more important than your specific mix of assets is your commitment to keep your money invested through thick and thin,” says investment adviser Rick Ferri of Portfolio Solutions.

Sticking to a tilted portfolio, which is bound to be out of step at times, requires extra commitment.

How to retool: You don’t have to go whole hog on this strategy. Adding even a style-focused ETF like Vanguard Small Cap Value VANGUARD INDEX FDS SMALL-CAP VALUE ETF VBR -0.1442% gets you some tilt. Or, says Daniel Solin, also a Buckingham adviser, you could add the value and small-cap factors separately, with Vanguard Value Index VANGUARD INDEX FDS VALUE PORTFOLIO VIVAX 0.0623% and Vanguard Small Cap Index VANGUARD INDEX FDS SMALL CAP STK PORTFOLIO NAESX 0.091% .

If more than 50% of your overall stock mix is in value, and more than 10% is in small caps, you’re tilted. A similar strategy can also be applied to your foreign holdings using iShares MSCI EAFE Value ISHARES TRUST MSCI EAFE VALUE ETF EFV 0.1474% and iShares MSCI EAFE Small Cap ISHARES TRUST MSCI EAFE SMALL-CAP ETF SCZ -0.1524% .


Bonds are your frenemy

While correlations within the stock market have risen over the years, Treasuries, the core of many bond portfolios, are now negatively correlated with equities — they often move in the opposite direction. That would be great, if their sub-2% yields didn’t make them such unappealing investments.

“You’re not necessarily being compensated enough for the interest rate risk looming around the corner,” says Peter Palfrey of Loomis Sayles Core Plus Bond Fund, putting it mildly. The duration, or interest rate sensitivity, of a 10-year Treasury is 8.8 years, meaning a one percentage point spike in rates would cut its price 8.8%.

The lack of yield is a big enough worry that veteran investment adviser Charley Ellis, a longtime advocate of a passive buy-and-hold approach to investing, told MONEY in an interview last month that his best advice is to not own bonds.

The tough question is, What would you do instead? Adding a lot of equities can’t be the answer. As the Cyprus crisis earlier this year showed, the global economy is hardly out of the woods yet; bonds will probably still be a cushion in future stock shocks. Cash or CDs are an option for safety, but that means living with yields from barely over zero to 1%.

How to retool: Although not as safe from a rate spike as cash, Treasuries with durations below three years still offer a reasonable amount of protection from a rate turn.

Wealth manager Chris Cordaro of RegentAtlantic Capital also suggests that you diversify with some highly rated corporate bonds. They don’t add much risk of default, and the higher yields they pay give you an extra cushion against an interest rate move. Vanguard Short Term Bond VANGUARD BD IDX FD SHORT-TERM BOND BSV -0.0686% , a low-cost ETF, is mostly Treasuries, but keeps about 20% of its portfolio in high-grade corporate bonds.

Also look beyond the U.S. “Foreign bonds give you good value today, with better yields than Treasuries for income and protection against interest rate risk,” says Bohemia, N.Y., financial planner Ronald Rogé. He suggests that you make foreign bonds about 10% of your bond stake. Pimco Foreign Bon PIMCO FDS PAC INVT FGN BD A USD H PFOAX 0.1826% d is a solid choice that employs hedges against currency risk — the possibility that falling foreign currency knocks out some return.

Finally, if going shorter leaves you hungry for income, consider a change on the stock side of your portfolio. “Many good-quality stocks can get you 3% or 4% yields right now,” Rogé says. SPDR S&P Dividend SPDR SERIES TRUST DIVIDEND ETF SDY -0.1906% , an ETF, currently yields 2.8%; the Vanguard Value Index Fund’s yield is 2.5%.


Inflation is worth fighting

Shortening-up addresses the interest rate risk in your bond portfolio. Another risk remains on the table: inflation.

Rising prices haven’t been much of an issue in this slow-growth economy — and many economic experts say they may not be for some time — but a diversified portfolio isn’t about protecting against what’s likely to happen. It is insurance against painful shocks.

Boston University economist Zvi Bodie notes that the long-run forecast for inflation is about 2.5% a year. “But I am highly uncertain,” he adds. “I would not be very surprised if it turns out to be 4% or 5%.”

The good news is that the U.S. Treasury sells really effective insurance against inflation in the form of bonds called TIPS, which adjust their principal value in line with rising consumer prices. The bad news is that the yields on them are really lousy — in fact, they are now -0.64%. In other words, you are guaranteed to lose a bit of money on them if you hold to maturity.

Who’d take the government up on an offer like that? You might, once you know that -0.64% represents the real, or after-inflation, yield. Buy a normal 10-year bond yielding 1.73% and you will lose just as much if inflation runs a moderate 2.37%. If it’s higher, you’ll lose more. Although TIPS can’t fix the fact that yields on all kinds of Treasuries are low, they do deliver truth in advertising and probably better real yields than savings accounts or CDs.

How to retool: TIPS are as vulnerable to interest rate risk as any Treasury, so for the most part short is the way to go. Pick the low-cost Vanguard Short-Term Inflation Protected Securities VANGUARD MALVERN F SH-TERM INFL PROTECTED ETF VTIP -0.062% or buy short-maturity TIPS directly at

As for how much you need to hold in TIPS, consider your life stage. “The average person might have half TIPS and half Treasuries,” says Swedroe. (So if you have a bond fund that’s mostly regular Treasuries, you’d dial back that investment to add a TIPS fund.) He adds that older people will want a bit more, since inflation poses the most serious threat to those dependent on investments for income. Younger people still in the workforce need fewer TIPS.

Unlike with regular Treasuries, there’s a case for owning longer TIPS, but individually, not in a fund. If you need to protect money with no chance of a surprise loss, a TIPS bond protects purchasing power (minus that negative yield). That’s provided, of course, you know for sure you will hold until maturity.


The new diversification tools Wall Street sells are already rusty

Wall Street’s response to high correlations and lousy bond yields has been to sell “alternatives” — a mixed bag of everything from commodity futures to hedge fund strategies. Avoid these often expensive funds.

The diversification and return potential of alternatives is overstated, argues William Bernstein in the e-book Skating Where the Puck Was.

Commodities futures, for example, had amazing records a decade ago. They beat bonds and stocks, and correlated with neither. But new indexes, funds, and ETFs now mean that anyone can pile into futures — and they have. As the market has become crowded, returns have been lower, and correlations have risen too. When investors were running for the exits in 2008 and 2009, they dumped their futures bets along with their stocks. “The moment you securitize an asset, you begin to destroy its diversification benefits,” says Bernstein.

The same applies to hedge-fund-like strategies such as “absolute return” and “market neutral.” By the time such strategies get to retail, they may be too well-known to work.

There’s no magic combination of assets that will make you a winner every year. Cover the big dangers — a long slump, a rate turn, and inflation — and leave RORO worries to Wall Street’s hyperactive set.

MONEY Ask the Expert

Where Social Security Fits in Your Retirement Portfolio

Q. Can I consider Social Security the bond portion of my portfolio and invest a higher percentage of my savings in stocks? — Michael H., Pittsboro, Ind.

A. Social Security does function somewhat like a bond in that it provides steady income (although unlike most bond payments, Social Security’s payouts increase with inflation). So, in theory at least, it makes sense to factor in your Social Security benefit when deciding how to invest your savings in retirement.

As a practical matter, however, you need to be careful about how far you take this notion, as you could end up with a portfolio that many retirees might consider too risky.

Here’s an example. Let’s assume you retire at age 66 and that you need real, or inflation-adjusted, income of $60,000 a year, $20,000 of which will come from Social Security. And let’s also say youhave $1 million in savings and that you divvy up that nest egg equally between stocks and bonds in order to have a reasonable balance between long-term growth and short-term protection against market setbacks.

If you think of Social Security only as a stream of income and forget about the fact that it’s also kind of like a bond,then the issue you face boils down to how to get the rest of the income you need from your $1 million nest egg. If you go to an online retirement calculator, plug in savings of $1 million,an allocation of50% in stocks and 50% in bonds and assume a $40,000 initial withdrawal that is annually increased by inflation, you’ll see that there’s a roughly 80% chance your savings will last at least 30 years.

But this approach ignores the fact that Social Security also acts somewhat like a big bond.

Indeed, many economists would say that you don’t just have $1 million in assets. You have $1 million, plus a “Social Security” bond that makes inflation-adjusted payments of $20,000 a year. They’d also say that by not taking that bond into account, you may be investing too cautiously, ending up with more in bonds than you should. In so doing, you may be giving up a significant amount of investment return, and extra retirement income.

You can argue about how to set the value of that Social Security bond. But in today’s interest rate environment, William Meyer of Social Security Solutions, a firm that helps people decide when to claim their benefits, estimates its value would be roughly $500,000 for someone whose full retirement age for Social Security purposes is 66 and who begins collecting payments at that age.

Considered from this vantage point, you would have the equivalent of $1.5 million — $1 million in savings, plus a Social Security bond valued at $500,000. Which means if you want to maintain an investment mix of 50% stocks and 50% bonds, you would put $750,000 of your $1 million savings into stocks.

The remaining $250,000 would go into bonds, which, combined with your $500,000 Social Security bond, would give you $750,000 in bonds overall, resulting in an effective 50-50 stocks-bonds split for the $1.5 million.

But here’s the rub: If you look only at the actual assets you have access to — that is, your $1 million in savings — you’ve got 75% in stocks ($750,000 of your $1 million) and 25% in bonds ($250,000 of your $1 million). That’s a pretty aggressive portfolio for a retiree.

Related: 4 ways the market could really surprise you

Meyer agrees that such a high stock stake would “freak out” a lot of people, as it’s more prone to sizable setbacks. But he also argues that the higher volatility of such a portfolio shouldn’t unduly upset you because you also have those guaranteed Social Security payments coming in every month regardless of what’s going on in the financial markets.

So the value of that Social Security bond holds up even when the market is falling apart. Thus, if you take a broader view, your portfolio isn’t as volatile as it may seem.

In a purely logical sense, he’s right. But I’m also reminded of 19th century humorist Edgar William Nye’s famous quote that “Wagner’s music is better than it sounds.” Which is to say that you can’t always go by logic alone, especially when it comes to something like your lifetime savings. You’ve also got to consider the emotional and psychological impact of how you invest that money.

I think most retirees are going to focus on the account balance they can see, the $1 million, not the combination of that amount plus a hypothetical asset value they can’t actually see, or tap into for that matter.

So even if they own the theoretical equivalent of a $500,000 Social Security bond, I’m not sure that most investors would be prepared to handle the volatility of a $1 million nest egg invested 75% in stocks and 25% in bonds if a 50-50 split is more their speed.

Besides, if your nest egg is all you have to get you through emergencies and absorb unexpected costs, it’s important you don’t unduly expose it to the vicissitudes of the market. After all, if that money runs out, it’s not as if you can cash in a portion of your Social Security bond to pay for larger-than-expected health care expenses.

And while a $1 million nest egg invested in a blend of 75% stocks-25% bonds has roughly the same likelihood of generating $40,000 a year throughout retirement as a 50-50 mix does — and could generate even more — you run a larger risk of exhausting your savings if the market takes a dive early in retirement.

Related: Do you need an investment adviser?

That said, I could see situations in which factoring in Social Security might lead you to invest more aggressively.

For example, if Social Security, alone or combined with some other type of guaranteed income, such as a pension, covers so much of your living expenses that a big downturn in the value of your savings wouldn’t force you to scale back your lifestyle, a more stock-heavy portfolio with the potential for higher returns could be a reasonable way to go.

Even then, however, tilting more toward stocks would make sense only if you also have the emotional and psychological tolerance to handle the potentially larger setbacks.

Bottom line: I think you should consider your Social Security payments when deciding how to allocate your savings between stocks and bonds in retirement. Ultimately, though, whatever mix you come up with for the actual savings you have in retirement accounts should be one that has a realistic shot of generating the income you need in retirement –and that you’ll be comfortable sticking with even if the market nose dives.

MONEY Ask the Expert

Long-Term Investing: Keep It Simple

Q. I have $12,000 that I’m ready to invest for a long term. But I’m not sure whether to buy regular mutual funds, index funds or a mix of both. What do you suggest? — Daniel, Sugarland, Texas

A. I believe that investors are generally better off when they keep things simple. So for that reason alone, I’d go with index funds.

You can make a very nice diversified portfolio for yourself by combining just two funds: a total stock market index fund VANGUARD INDEX FDS TOTAL STK MARKET PORTFOLIO VTSMX -0.3016% and a total bond market index fund VANGUARD BD IDX FD COM NPV VBMFX 0.0924% . That would give you a portfolio that covers all sectors of the U.S. stock market — large and small caps, value and growth shares, virtually every industry — as well as the entire investment-grade taxable bond market, including government and corporate bonds.

You would do just fine if you stopped there.

But if you want to add some exposure to foreign markets — which over the long run can reduce the volatility of your portfolio overall — you could also throw in a total international stock index fund VANGUARD STAR FUND TOTAL INTL STOCK INDEX FD VGTSX 0.2291% . For guidance on how to divvy up your holdings between stocks and bonds, you can check out our Fix Your Mix asset allocation tool.

Simplicity aside, this approach offers another huge benefit: low annual expenses.

By sticking to diversified stock and bond index funds, you’ll likely pay yearly fees of less than 0.25% of the amount invested, in some cases less than half that figure. Regular, or actively managed, mutual funds on the other hand, often charge 1% of assets or more. And while there’s no guarantee that lower expenses leads to better performance, there’s plenty of evidence that’s the case, including this 2010 Morningstar study.

Oh, and there’s one more reason I prefer index funds: You know exactly what you’re getting. As their name implies, index funds track a particular index or stock market benchmark. The fund holds all, or in some cases a representative sample, of the stocks in the index and nothing more (except, perhaps, a smidgen of cash to accommodate redeeming shareholders).

Managers of actively managed funds, by contrast, have lots of wiggle room when it comes to investing.

So even though a fund may purport to specialize in, say, domestic large-cap value stocks, it’s not unusual to find a manager making forays into small-caps, growth stocks or even foreign shares in an attempt to juice returns. This sort of “adventurism” makes it harder to use actively managed funds as building blocks for a diversified portfolio in which you’re counting on each fund to play a specific role.

But as much as I believe index funds are the better choice, I don’t think you’d be jeopardizing your financial future by devoting a portion of your investing stash to actively managed funds. And if that’s the way you want to roll, you should have no trouble finding funds run by smart managers with solid long-term records who can do a credible job of investing your money.

In that case, you might employ a version of what’s known as a “core and explore” strategy: put most of your money into index funds and then round out your portfolio with some well-chosen actively managed funds.

Related: Mutual funds – a simple way to diversify your portfolio

How much of your dough goes into the core vs. explore is up to you. But to prevent any bad picks from undermining your portfolio’s overall performance, I’d recommend keeping the active portion of your holdings pretty small, say, 10% to 15%.

There’s one other thing you’ll want to be careful about if you decide to take this hybrid approach. Some advisers suggest using index funds in “efficient” markets like those for U.S. and developed country large-cap stocks and recommend actively managed funds for “inefficient” markets like those for small-caps and emerging market stocks. But identifying efficient vs. inefficient markets isn’t quite so simple, and finding active managers who consistently outperform is difficult in almost any market.

So I’d recommend that you get exposure to all markets with index funds and then add the actively managed funds you like even if it means you’ll have a bit of overlap in some areas.

I also suggest that as much as possible you go with actively managed funds that have reasonable expenses, as that should give those funds a better shot at competitive performance. You can find such funds, as well as all the index funds you’ll need, on our MONEY 50 list of recommended funds.

To sum up, I think most investors would be best served if they just stick with a straightforward portfolio of broad index funds.

Human nature being what it is, however, many people will give in to the urge to venture beyond the indexes for the thrill (even if only fleeting) of finding a fund that beats the market. If you’re one of those people, fine. Just don’t let yielding to that urge undermine your investing results.

MONEY Ask the Expert

Retirement Savings Checkup for the New Year

Q. I save 15% of my salary each year in my 401(k), my company matches another 4.5% and I contribute the max to a Roth IRA. Am I doing enough to safely retire? — Dave K., Jacksonville Beach, Fla.

A. If you continue at the rate you’re saving, it’s hard to imagine you’ll come up short at retirement time. After all, you’re socking away money at more than double the rate of most 401(k) participants, plus you’re funding that Roth IRA.

But as important as diligent saving is, your savings rate alone can’t tell you whether you’re on track for a secure retirement. To know for sure, you’ve got to undertake a more comprehensive review of your retirement planning efforts.

You can do that by performing what I call my annual New Year’s Retirement-Planning Checkup. It consists of just three simple steps:

1. Figure the odds. There are so many unknowns and potential detours along the road to retirement — market setbacks, spates of unemployment, emergencies that drain savings — that you can never say that a secure retirement is a given.

Related: Take control of your spending

But by taking a look at where you stand now as well as the strategy you’re currently employing,you can get an estimate of the probability that you’ll be able to maintain an acceptable standard of living once you retire.

The easiest way to do such an assessment is to go to a robust online tool like our Retirement Planner or T. Rowe Price’s Retirement Income Calculator. You just plug in such information as how much you’ve already got tucked away in retirement accounts, the percentage of salary you’re saving now, how those savings are invested and the age at which you intend to retire, and you’ll get an immediate forecast of your chances of being able to retire on, say, 75% of your pre-retirement salary.

Aside from the obvious benefit of letting you know whether the path you’re on has a decent chance of leading to a comfy post-career life, this sort of evaluation has another advantage: by changing a few variables — your savings rate, how you invest, the age at which you retire, whether you work part-time in retirement — you can see how you might be able to increase your shot at a secure retirement.

This type of exercise is essential if you really want to know whether you’re making progress toward retirement. If you don’t feel confident doing this sort of number crunching on your own, then consider hiring a pro to guide you through the process. Just be sure to vet that adviser carefully.

2. Evaluate your portfolio. Although I’ve long noted that diligent saving is more crucial to retirement success than savvy investing, you nonetheless want to be sure you’re not undermining your savings effort with an inferior investment strategy.

Your first task on the investingfront is to makesure you’ve got a mix of stocks and bonds that’s appropriate given your age and risk tolerance.

Generally, the younger you are, the more of your retirement savings you’ll want to invest in stocks. As retirement nears and preserving your nest egg becomes a bigger priority than growing it, you’ll want to shift more toward bonds. There’s no single stocks-bonds blend that’s right for everyone.

As a starting point, you can check out the mix for a target-date retirement fund designed for someone your age. You can then see how such a blend might actually perform by going to Morningstar’s Asset Allocator tool. If you find that the mix you’re considering is too aggressive or too conservative, you can then adjust it.

You also want to be sure that your respective stock and bond holdings are properly diversified. In the case of stocks, for example, that means owning shares of both large and small companies as well as a broad range of industries. To gauge whether your portfolio is reasonably balanced compared with market benchmarks, plug your holdings into Morningstar’s Portfolio X-Ray tool.

Finally, take a hard look at what you’re shelling out in annual expenses.

Reducing the portion of your return that’s siphoned off by investment costs can have a big payoff. Lowering expenses from, say, 1.5% a year to 0.5% can increase the eventual size of your nest egg by roughly 20%. Fortunately, federal rules that went into effect in August make it much easier for 401(k) participants to see what they’re actually paying in fees and thus home in on the low-cost options in their plan’s investment roster.

3. Schedule updates. Once you’ve completed this checkup, you don’t need to fiddle with your retirement strategy every waking moment. Still, it is a good idea to check in occasionally just to be sure the plan you’ve put in place is working as expected.

So take a moment now to schedule a few specific times during the coming year — the end of a quarter, a birthday, wedding anniversary, whatever — when you can do quick re-assessment of where you stand and make tweaks if needed.

If you experience a significant change in your circumstances — say, moving to a new job or taking on a big new financial commitment — then you may very well want to perform a full-blown review.

Bottom line: There’s no way to eliminate uncertainty when it comes to retirement planning. But if you combine this sort of annual checkup with periodic monitoring throughout the year, you’ll dramatically improve your chances of getting, and staying, on the path to a secure retirement.

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