Navigating Your 401(K) Choices: To Invest Or Not To Invest?

Once you start contributing money to a 401(k), you then have to choose investments. If you don't, your contributions will sit in a money market account. When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns. Experts suggest checking that your investments are properly aligned with your risk tolerance each year and rebalancing as necessary.

Diversify investments between four types of mutual funds

Once you start contributing money to a 401(k), you then have to choose investments. Otherwise, your contributions will sit in a money market account.

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

Experts suggest checking that your investments are properly aligned with your risk tolerance each year and rebalancing as necessary, though how often you actually do will vary based on personal preference.

If you're still unsure, you can also take the Investment Risk Tolerance Assessment created by personal financial planning professors Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia.

Check investments align with risk tolerance

When choosing investments for your 401(k), it's important to consider your risk tolerance. Risk tolerance refers to your ability to withstand market volatility and how comfortable you are with the potential for loss. If you have decades until you retire, you can afford to take on more risk and might choose a higher allocation of stocks. However, as you get closer to retirement, it's important to scale back on risk and rebalance your portfolio to protect your savings.

One way to assess your risk tolerance is to take an investment risk tolerance assessment, which can be created by personal financial planning professors. This assessment will help you understand your risk profile and make informed decisions about your investments.

Another important factor to consider when choosing investments for your 401(k) is diversification. Diversifying your investments between different types of mutual funds can help reduce risk and protect your savings. Some examples of mutual funds that you can choose from include growth and income, growth, aggressive growth, and international.

It's also important to regularly review your investments and rebalance as necessary. This will help you ensure that your investments are aligned with your risk tolerance and protect your savings over the long term.

In addition, it's important to choose investments that are appropriate for your financial goals and time horizon. For example, if you have a long time until retirement, you might want to choose investments that are more aggressive and have the potential for higher returns. However, if you are closer to retirement, you might want to choose investments that are more conservative and have less risk.

Consider investing horizon

When choosing investments for your 401(k), it's important to consider your investing horizon. This refers to the amount of time you have until you plan to retire or start taking distributions from your 401(k). If you have decades until retirement, you can afford to take on more risk. This might mean choosing an 80-20 stock mix for now. As you get closer to retirement, you'll want to scale back on riskier investments and rebalance your portfolio to align with your goals and risk tolerance.

Experts suggest checking your investments against your risk tolerance each year and rebalancing as necessary. You can also take an Investment Risk Tolerance Assessment to help you decide.

When choosing investments, it's also important to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

If you're still unsure about how to choose investments for your 401(k), you can contact your 401(k) plan manager to find out if you have the option to choose between a Roth 401(k) or a traditional 401(k).

Choose target-date funds to avoid mistakes

Once you start contributing money to a 401(k), you then have to choose investments. Otherwise, your contributions will sit in a money market account.

Choosing target-date funds will help you avoid mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate your investment strategy. Over time, the fund will automatically rebalance, becoming more conservative as you near retirement.

If you choose a target-date fund, you only need to choose the one fund — otherwise you're essentially canceling out its benefits. Another mistake to avoid with target-date funds is choosing a year without researching how it will change its mix of stocks and bonds over time.

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Experts suggest checking that your investments are properly aligned with your risk tolerance each year and rebalancing as necessary, though how often you actually do will vary based on personal preference. If you're still unsure, you can also take the Investment Risk Tolerance Assessment created by personal financial planning professors Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia.

Contact 401(k) plan manager for options

Once you start contributing money to a 401(k), you then have to choose investments. Otherwise, your contributions will sit in a money market account.

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

If you're still unsure, you can also take the Investment Risk Tolerance Assessment created by personal financial planning professors Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia.

Contact your 401(k) plan manager to find out if you have the option to choose between a Roth 401(k) or a traditional 401(k). We love the Roth option funded with after-tax contributions because your investments will grow tax-free, and you’ll get tax-free withdrawals in retirement.

Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

Frequently asked questions