Navigating Your 401(K): Invest Or Hold Back?

You don't have to invest your 401k, but it's important to save in these types of plans. Your employer may offer products in the plan that can help with some of the investment decisions. Those looking for simplicity may choose a single fund option that typically includes 2 types of asset allocation funds: target date funds, based on an expected retirement date, and target allocation funds, based on a risk tolerance and time horizon. Target date funds are managed with a focus on a specific retirement year.

Diversification

Especially now that target date retirement funds (mutual funds that change allocation based on your estimated retirement date, growing more conservative as you age) have become popular, you do not need to invest in every bond fund and every stock fund to achieve diversification.

Another common mistake made by investors in their 401(k)s is to invest an equal portion into each available investment option. This is called the 1/N Rule. There are many problems with taking this approach. First, you do not need to invest in every option available in your plan.

You don’t have to be an expert to invest your retirement savings. Your employer may offer products in the plan that can help with some of the investment decisions. Those looking for simplicity may choose a single fund option that typically includes 2 types of asset allocation funds: target date funds, based on an expected retirement date, and target allocation funds, based on a risk tolerance and time horizon.

If you don't need to make withdrawals from your 401(k) immediately after you retire, it's possible that your investment mix won't need much adjusting. You don't want to outlive your money, so shifting too early to an investment mix that is too conservative may not be suitable for your situation.

Time horizon

When investing in a 401(k), it is important to consider your time horizon, which is the length of time you plan to keep your money in the investment. This will determine the level of risk you are willing to take and the type of investments you should make.

If you have a long time horizon, you may be willing to take on more risk in exchange for higher returns. In this case, you may want to invest in more aggressive assets such as stocks or mutual funds.

On the other hand, if you have a short time horizon, you may want to play it safe and invest in more conservative assets such as bonds or money market funds. This will ensure that your money is protected even if the market takes a downturn.

It's important to note that your time horizon may change over time, so it's a good idea to review your investments regularly and adjust your portfolio as needed.

Investment mix

Diversification is a way to minimise investment risk and is a simple way to diversify is to invest in mutual funds and ETFs, which are basically "baskets" of stocks and/or bonds.

Target date retirement funds are mutual funds that change allocation based on your estimated retirement date, growing more conservative as you age.

Money market and stable value funds are fancy words for cash, a low-risk, low-return investment, and the return from cash usually lags behind inflation.

Target date funds are managed with a focus on a specific retirement year. Target allocation funds are based on a risk tolerance and time horizon.

If you don't need to make withdrawals from your 401(k) immediately after you retire, it's possible that your investment mix won't need much adjusting. Shifting too early to an investment mix that is too conservative may not be suitable for your situation.

Market risk

Most 401(k) plans offer a choice of investments, usually mutual funds or exchange-traded funds (ETFs). These investments can be subject to market risk, which means that they may lose value over time. It is important to diversify your investments to minimize market risk. This means not putting all your eggs in one basket and investing in a variety of assets.

Diversification can be achieved by investing in mutual funds and ETFs, which are "baskets" of stocks and/or bonds. This can help to reduce the impact of market risk on your investments.

It is also important to consider your investment horizon when investing in a 401(k) plan. If you have a long investment horizon, you may be able to tolerate some volatility to get higher returns later. However, if you are close to retirement, you may want to consider a more conservative investment mix to protect your savings.

Finally, it is important to remember that past performance is not an indication of future results. Market risk is an inherent part of investing, and it is important to understand the potential risks and rewards before making any investment decisions.

Employer products

Your employer may offer products in the plan that can help with some of the investment decisions. Those looking for simplicity may choose a single fund option that typically includes 2 types of asset allocation funds: target date funds, based on an expected retirement date, and target allocation funds, based on a risk tolerance and time horizon. Target date funds are managed with a focus on a specific retirement year.

Most 401(k) plans help put your money to work by offering a choice of investments, usually mutual funds or exchange-traded funds (ETFs). This is a good way to start investing. Sure, there are risks, but you have an extra advantage. When you start investing in your 20s, time is on your side to help you ride out market ups and downs. Diversification is another way to help minimize investment risk. This means not putting all your eggs in one basket. A simple way to diversify is to invest in mutual funds and ETFs, which are basically "baskets" of stocks and/or bonds.

A guaranteed monthly income for life sounds attractive on the surface, but it's possible that saving and investing your 401(k) balance on your own or with the help of a financial professional can make more financial sense in the long run. If you don't need to make withdrawals from your 401(k) immediately after you retire, it's possible that your investment mix won't need much adjusting. You don't want to outlive your money, so shifting too early to an investment mix that is too conservative may not be suitable for your situation. Investments may lose value over time. Past performance is not an indication of future results.

Another common mistake made by investors in their 401(k)s is to invest an equal portion into each available investment option. This is called the 1/N Rule. There are many problems with taking this approach. First, you do not need to invest in every option available in your plan. Especially now that target date retirement funds (mutual funds that change allocation based on your estimated retirement date, growing more conservative as you age) have become popular, you do not need to invest in every bond fund and every stock fund to achieve diversification.

Money market and stable value funds are fancy words for cash, a low risk, low return investment, and the return from cash usually lags behind inflation. This means that a 401(k) in these safe investments will probably decline in value over time. For many, the investment horizon is long, so you can tolerate some volatility to get higher returns later.

Frequently asked questions