Navigating Your 401(K) Investments: Strategies For Optimal Allocation

When investing your 401(k), you should consider your ability and willingness to take risk, as well as your investment time horizon. Spreading your 401(k) account balance across various investment types is a good idea, as diversification helps you capture returns from a mix of investments and protects your balance against the risk of a downturn in any one asset class. Review your asset allocations periodically, and consider investing in a target date mutual fund, which allocates your dollars among different asset classes and adjusts the weightings as you near retirement.

Diversify your portfolio

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.

Once you choose your funds you should rebalance and set your current 401k allocation to it, as well as your future contributions (if you are still contributing). This is usually a two-step process. You will also need to turn the automatic rebalancing feature on within your 401(k). An automatic rebalance can usually be applied quarterly, semi-annually, or annually (we generally prefer quarterly). Its purpose is to bring your portfolio back into alignment with your target percentages for each fund and help reduce risk over time. If you don’t rebalance, your portfolio could become overweight in the area that has performed the best, but this area is also most exposed to a big drop.

The first strategy to consider for investing the money in your 401(k) is to invest in a target date mutual fund. Target date funds are run by investment professionals that allocate your dollars among different asset classes, such as stocks and bonds, and usually adjust the weightings as you near retirement. In other words, target date funds are like having an investment manager who manages your 401(k) and de-risks your portfolio as retirement nears. A target date fund labeled “2020” would normally be used for someone planning to retire near the year 2020 and should be invested conservatively with a higher weighting of bonds.

Generally speaking, more aggressive portfolio allocations tend to be more appropriate for younger investors with longer time horizons as they have time to make up for larger losses that may occur in a given year. More conservative allocations tend to be more appropriate for older investors as they have less time to make up for larger losses and may have to lock in the large losses to raise cash for distributions in retirement. Your ability and willingness to take risk need to be factored into your 401k investment strategy and it will likely change as you near or are in retirement.

Rebalance your portfolio

Rebalancing your portfolio is a two-step process that involves setting your current 401k allocation to your chosen funds and turning on the automatic rebalancing feature. Automatic rebalancing can be applied quarterly, semi-annually, or annually and is designed to bring your portfolio back into alignment with your target percentages for each fund and reduce risk over time.

Diversification is a key strategy for maximising your 401k and involves spreading your 401k account balance across various investment types, such as stocks, bonds, commodities, and others. This helps to capture returns from a mix of investments and protect your balance against the risk of a downturn in any one asset class.

When choosing your asset-allocation approach, it's important to consider your ability and willingness to take risk, as this will likely change as you near or are in retirement. More aggressive portfolio allocations are typically more appropriate for younger investors with longer time horizons, as they have time to make up for larger losses that may occur in a given year. More conservative allocations are usually more appropriate for older investors, as they have less time to make up for larger losses and may have to lock in the large losses to raise cash for distributions in retirement.

One strategy for investing your 401k is to invest in a target date mutual fund. These funds are run by investment professionals that allocate your dollars among different asset classes, such as stocks and bonds, and usually adjust the weightings as you near retirement. This means that target date funds are like having an investment manager who manages your 401k and de-risks your portfolio as retirement nears.

Finally, 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 401k portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings.

Invest in target date mutual funds

Target date funds are run by investment professionals that allocate your dollars among different asset classes, such as stocks and bonds, and usually adjust the weightings as you near retirement. In other words, target date funds are like having an investment manager who manages your 401(k) and de-risks your portfolio as retirement nears. A target date fund labeled “2020” would normally be used for someone planning to retire near the year 2020 and should be invested conservatively with a higher weighting of bonds.

Your ability and willingness to take risk need to be factored into your 401k investment strategy and it will likely change as you near or are in retirement. More aggressive portfolio allocations tend to be more appropriate for younger investors with longer time horizons as they have time to make up for larger losses that may occur in a given year. More conservative allocations tend to be more appropriate for older investors as they have less time to make up for larger losses and may have to lock in the large losses to raise cash for distributions in retirement.

Once you choose your funds you should rebalance and set your current 401k allocation to it, as well as your future contributions (if you are still contributing). This is usually a two-step process. You will also need to turn the automatic rebalancing feature on within your 401(k). An automatic rebalance can usually be applied quarterly, semi-annually, or annually (we generally prefer quarterly). Its purpose is to bring your portfolio back into alignment with your target percentages for each fund and help reduce risk over time. If you don’t rebalance, your portfolio could become overweight in the area that has performed the best, but this area is also most exposed to a big drop.

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.

Consider your risk profile

When considering how to allocate your 401k investment, it is important to consider your risk profile. This is dictated by your investment time horizon and willingness/ability to take risk.

More aggressive portfolio allocations tend to be more appropriate for younger investors with longer time horizons as they have time to make up for larger losses that may occur in a given year. More conservative allocations tend to be more appropriate for older investors as they have less time to make up for larger losses and may have to lock in the large losses to raise cash for distributions in retirement.

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. Review your asset allocations periodically, perhaps annually, but try not to micromanage.

Once you choose your funds you should rebalance and set your current 401k allocation to it, as well as your future contributions (if you are still contributing). This is usually a two-step process. You will also need to turn the automatic rebalancing feature on within your 401(k). An automatic rebalance can usually be applied quarterly, semi-annually, or annually (we generally prefer quarterly). Its purpose is to bring your portfolio back into alignment with your target percentages for each fund and help reduce risk over time. If you don’t rebalance, your portfolio could become overweight in the area that has performed the best, but this area is also most exposed to a big drop.

The first strategy to consider for investing the money in your 401(k) is to invest in a target date mutual fund. Target date funds are run by investment professionals that allocate your dollars among different asset classes, such as stocks and bonds, and usually adjust the weightings as you near retirement. In other words, target date funds are like having an investment manager who manages your 401(k) and de-risks your portfolio as retirement nears.

Don't time the market

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.

Once you choose your funds you should rebalance and set your current 401k allocation to it, as well as your future contributions (if you are still contributing). This is usually a two-step process. You will also need to turn the automatic rebalancing feature on within your 401(k). An automatic rebalance can usually be applied quarterly, semi-annually, or annually (we generally prefer quarterly). Its purpose is to bring your portfolio back into alignment with your target percentages for each fund and help reduce risk over time. If you don’t rebalance, your portfolio could become overweight in the area that has performed the best, but this area is also most exposed to a big drop.

The first strategy to consider for investing the money in your 401(k) is to invest in a target date mutual fund. Target date funds are run by investment professionals that allocate your dollars among different asset classes, such as stocks and bonds, and usually adjust the weightings as you near retirement. In other words, target date funds are like having an investment manager who manages your 401(k) and de-risks your portfolio as retirement nears. A target date fund labeled “2020” would normally be used for someone planning to retire near the year 2020 and should be invested conservatively with a higher weighting of bonds.

Generally speaking, more aggressive portfolio allocations tend to be more appropriate for younger investors with longer time horizons as they have time to make up for larger losses that may occur in a given year. More conservative allocations tend to be more appropriate for older investors as they have less time to make up for larger losses and may have to lock in the large losses to raise cash for distributions in retirement. Your ability and willingness to take risk need to be factored into your 401k investment strategy and it will likely change as you near or are in retirement.

Frequently asked questions