There are few things in life as confusing as a 401k account. If your job isn’t in the financial sector, it’s nearly impossible to stay abreast of all the rules and changes that affect your savings plan.
There’s a reason people invest in financial advisers – they know their stuff far better than most do. Regardless, the majority of Americans prefer to “do it themselves” and assume a bit more risk while building their own portfolio.
Is that a bad idea? Is a financial adviser really worth the money?
Hey.. that’s your call. You’ll get vastly differing opinions on the subject if you head down the road of research and opt to Google it.
For those who choose to go it alone, here’s some great tips on how to build your 401k portfolio.
The Guide to 401k Savings
1) Start Saving Early and Save Often. Many people believe that what they invest in is the most important factor for their savings portfolio. Not true. How much you contribute to your savings plan will have a far greater impact on your overall savings.
The best time to start saving is immediately – the younger you are, the better. The 20 year old will be exceedingly happy he started saving so early and the 30 year old who is just starting a 401k, and calculating growth, will be wishing he had jumped in much sooner. You can’t get time back and losing time means losing compound interest, so start saving now.
2) Diversify. You need a mix of securities, so don’t just focus on company stock alone. Remember Enron? That’s the downside of having all your financial eggs in one basket.
If picking securities feels a little too intense, you’re worrying too much. If you get a good mix with a large variety of securities, you can rest assured that your portfolio will perform fine over the years.
3) Don’t Keep Changing Your Portfolio. For long term investing, you really shouldn’t check your portfolio any more often than once a year. You’ll drive yourself crazy if you’re looking every week.
The market fluctuates. Some stocks go up and some go down. Trends are a part of the pattern so accept it as a part of your portfolio’s normal behavior.
If you jump in and change securities every month, you’re going to miss out on the long-term advantages of market growth.
Your 401k is a pot of gold at the end of the retirement rainbow
4) Don’t Cash Out When Changing Jobs. This is one of the more common – and very foolish – mistakes seen, where a 401k savings account is concerned. Cashing out means giving up a lot of money to taxes and early withdrawal penalties. There are better options.
You can roll your money into an IRA, roll the money into the 401k plan of your new employer or even opt to keep it right where it’s at – with the company you’re leaving.
Individuals with less than $5,000 in savings can be forced to take their 401k with them when leaving a job. For others, weigh the options of both companies against the convenience of having all of your money at the same place.
Unless there are some outstanding advantages, it’s usually best to take your 401k with you when leaving a job – just don’t cash it out! Think IRA or new 401K.
Asset Allocation Tips
The following assumes that you are not going to keep selling your stocks when the market drops, assuming things will only get worse. These tips are for the long-term invester who understands that there will be fluctuations in the market and they leave their stocks alone.
If you’re investing for a short-period, such as 3-5 years and you can’t afford risk, invest in about 70% bonds, 15% large-cap stocks, 10% foreign stocks and 5% small-cap stocks.
If you want to assume the most risk, with the hope of the highest payout, put a little less into bonds, and a little more into large-cap stocks.
If you have a 20-year goal and want some average growth with very low-risk, invest in 45% large-cap stocks, 15% bonds, 20% small-cap stocks and 20% foreign stocks.
If you want to assume the most risk, with the hope of the highest payout, put a bit more into large-cap investments and less in bonds.
Most of all, have a little fun when choosing stocks. It really doesn’t have to be a laborious task. When you diversify, you’re protecting yourself and you also get the opportunity to “pick a winner” by choosing between many different options. It can be kind of fun once you get into it!
Life passes fast. Get started saving now and don’t touch that money – unless you’re considering paying off your home with your 401K.
If you’re lucky enough to have an employer that participates in a 401K program, there’s every reason you should take advantage. Early, often and long-term – that’s how you build your 401k portfolio.