Alan S. Moore / L’Observateur / June 27, 2000

There was a time when chicken coops were more common in backyards than gas grills and lawn chairs are today. Back then people knew theoriginal meaning of the term nest egg. To coax a hen to start laying eggsin the hen house, you simply placed an egg in her nesting box. Soonafterwards, more eggs would start accumulating.

Building up your retirement assets works in a similar way. Thecontributions 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 continueto 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’sperformance over past intervals of time. It’s important to examine thefund’s returns over a one-year, five-year, and ten-year period. Thencompare your results to a comparable market index of similar investments. But, keep in mind that indexes don’t have a fund’s operatingexpenses, 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 ayear ago won’t show you the growth of your investments. Both your paydaycontributions and any investment returns build your balance. Be sure tofigure 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. Forexample, 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 showwhether 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’simpressive 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. Knowingwhat’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.

ALAN S. MOORE is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. He writes this column every Wednesday for L’Observateur.

Return To News Stories