The markets are doing well, 401k balances are reaching all time highs, but that doesn’t mean you just feel secure. The crash of 2008 is not a distant memory. You should be doing everything you can to make the most of your 401k plan(s). Here are a few tips from MarketWatch.
The first tip is to invest in index funds. This will reduce expenses and reduce asset turnover (which will also keep expenses down). As a result, diversification will be improved and it’s the best way to control the exact asset classes in your portfolio. If your plan does not have index funds in some asset classes, look at exchange traded funds or ETFs. “Otherwise, remember that if you have access to an asset class (small-cap value stocks, for example) only through an actively managed fund, it’s more important to have that asset class than to hold out for only index funds,” says contributor Paul Merriman.
Next, you contributions should be automatic. Don’t look at a bear market and decide not to contribute. In fact, this is one of the best times to invest. You can buy assets at “below-average per-share prices”. Deciding to contribute no matter the situation will take a lot of stress out of your retirement planning.
An easy piece of advice to stick with is to save as much as you can. Even if you can’t afford to contribute the maximum every year, select a percentage of your pay to contribute, not just a dollar amount. When you get a raise or bonus, more money will go towards your retirement. Trust us, you won’t regret saving more now in the future. You can go back in time to save more so do it now while you still can!
Lastly, don’t get too overconfident in the markets. They’ve done staggeringly well over the last 12 months or so, but every investor knows that will change sooner or later. The younger you are, the more risks you can take. However, as you near retirement, you should look to include more bonds in your portfolio. You don’t have as much time to makeup for a down year in the market. If you are younger than 40, you should have mostly stocks, the reward is worth the risk and you have plenty of time to allow the markets to correct themselves over the years.