Navigating Your 401(K) Choices: Strategies For Smart Investing

Spreading your 401(k) account balance across various investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, commodities, and others—while protecting your balance against the risk of a downturn in any one asset class. You'll want to determine an appropriate asset allocation, or how much of your investments will be in stocks (also known as equities) and how much will be in safer investments, like bonds. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time. Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.

Asset allocation: Stocks vs. bonds

When it comes to investing in your 401(k), asset allocation is key. This is the process of deciding where your money will be invested and spreading out risk. Stocks (also known as equities) are the riskiest way to invest, while bonds and other fixed-income investments are the least risky.

Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time.

Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.

It's important to diversify your investments to mitigate risk, although many funds are already diversified. Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities. Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate.

It's important to review your asset allocations periodically, perhaps annually, but try not to micromanage. Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

Diversification: Spreading investments to mitigate risk

Diversification is a strategy that involves spreading investments to mitigate risk. This means that you are not putting all your eggs in one basket and could be exposed to a downturn in any one asset class.

Stocks are the riskiest way to invest, while bonds and other fixed-income investments are the least risky. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time.

Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.

Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities. Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate.

Review your asset allocations periodically, perhaps annually, but try not to micromanage. Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

Employer match: Maximizing contributions

Maximizing your employer's match is a great way to get the most out of your 401(k) plan. Many funds are already diversified, but at a minimum, you should contribute enough to maximize your employer's match. Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities. Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate.

Spreading your 401(k) account balance across various investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, commodities, and others—while protecting your balance against the risk of a downturn in any one asset class. Your decisions start with picking an asset-allocation approach you can live with during up and down markets. After that, it's a matter of fighting the temptation to time the market, trade too often or think you can outsmart the markets. Review your asset allocations periodically, perhaps annually, but try not to micromanage. Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky. You'll want to determine an appropriate asset allocation, or how much of your investments will be in stocks (also known as equities) and how much will be in "safer" investments, like bonds. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time. Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds. But think about your investing horizon.

Finding the money to save in the account is just step one. Step two is investing it, and that’s one place where people often get tripped up. Some people think investing is too risky, but the risk is actually in holding cash. That’s right: You’ll lose money if you don’t invest your retirement savings. Let’s say you have $10,000. Uninvested, it could be worth less than half that in 30 years, factoring in inflation. But invest 401(k) money at a 7% return, and you’ll have over $75,000 by the time you retire — and that’s with no further contributions.

Rebalancing: Monitoring performance

Rebalancing is an important part of managing your 401(k). Diversifying your investments is a good way to mitigate risk and capture returns from a mix of investments. Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities. Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate.

Once you have established a portfolio, monitor its performance and rebalance it when necessary. Review your asset allocations periodically, perhaps annually, but try not to micromanage. Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time.

You'll want to determine an appropriate asset allocation, or how much of your investments will be in stocks (also known as equities) and how much will be in "safer" investments, like bonds. Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds. But think about your investing horizon.

Spreading your 401(k) account balance across various investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, commodities, and others—while protecting your balance against the risk of a downturn in any one asset class. Your decisions start with picking an asset-allocation approach you can live with during up and down markets. After that, it's a matter of fighting the temptation to time the market, trade too often or think you can outsmart the markets.

Risk tolerance: Understanding your risk appetite

Spreading your 401(k) account balance across various investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, commodities, and others—while protecting your balance against the risk of a downturn in any one asset class. Stocks—often called equities—are the riskiest way to invest; bonds and other fixed-income investments are the least risky. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time.

You'll want to determine an appropriate asset allocation, or how much of your investments will be in stocks (also known as equities) and how much will be in "safer" investments, like bonds. Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.

Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities. Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate. All of the major financial firms use similar wording.

Be sure to diversify your investments to mitigate risk, although many funds are already diversified. At a minimum, contribute enough to maximise your employer’s match. Once you have established a portfolio, monitor its performance and rebalance it when necessary. Review your asset allocations periodically, perhaps annually, but try not to micromanage. Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

The risk is actually in holding cash. That’s right: You’ll lose money if you don’t invest your retirement savings. Let’s say you have $10,000. Uninvested, it could be worth less than half that in 30 years, factoring in inflation. But invest 401(k) money at a 7% return, and you’ll have over $75,000 by the time you retire — and that’s with no further contributions.

Frequently asked questions