Smart Strategies: Navigating 401K Investment Elections For Optimal Growth

Choosing investment elections for your 401(k) can be a daunting task, but it's important to remember that the sooner you start investing, the less you'll have to save each month to reach your goals, thanks to compound interest. Experts suggest checking that your investments are properly aligned with your risk tolerance each year and rebalancing as necessary. Target date funds will help people avoid blowing up their portfolios by making avoidable mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate their investment strategy.

Consider your investing horizon

When choosing investment elections for your 401(k), it's important to consider your investing horizon. If you have decades until you're going to retire, then you can afford a bit more risk. You might choose an 80-20 stock mix for now. When you're older, you'll start scaling that back, depending on your goals and, again, your appetite for risk. 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.

Most people aren't interested in researching [and] selecting funds for their 401(k), says Charles C. Weeks, a Philadelphia-based CFP. Target date funds will help people avoid blowing up their portfolios by making avoidable mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate their 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, says Howard Pressman, a Virginia-based CFP.

Someone may find that they would like a more or less risky mix of investments than what's in the target-date fund they are considering, says Press. Financial experts advise contributing as much as you are able to, ideally between 10% to 15% of your income, especially when you are young. The sooner you start investing, the less you'll have to save each month to reach your goals, thanks to compound interest. Here are two scenarios that illustrate why it's so advantageous to start early: You start investing at 19 and contribute $2,000 to your account every year until you reach 27. From 27 to 65, you contribute $0. Assuming a 10% rate of return, you would have $1.02 million by 65. From 19 to 26, you don't invest anything.

Research target-date funds

Target-date funds are a great way to avoid making mistakes when choosing investments for your 401(k). These funds will automatically rebalance over time, becoming more conservative as you near retirement.

When choosing a target-date fund, it's important to research how it will change its mix of stocks and bonds over time. This will help you understand the level of risk associated with the fund. If you find that you would like a more or less risky mix of investments than what's in the target-date fund you are considering, you can adjust your contributions accordingly.

It's also important to check that your investments are properly aligned with your risk tolerance each year and rebalance as necessary. This will help you stay on track and achieve your financial goals.

Additionally, it's recommended to start contributing as much as you are able to, ideally between 10% to 15% of your income, especially when you are young. The sooner you start investing, the less you'll have to save each month to reach your goals, thanks to compound interest.

By researching target-date funds and adjusting your contributions, you can make informed decisions about your 401(k) investments and stay on track to achieve your financial goals.

Rebalance your investments regularly

Rebalancing your investments regularly is a key step in managing your 401(k) effectively. It involves adjusting the allocation of your assets to ensure they align with your investment goals and risk tolerance. Here's a detailed guide on why and how to rebalance your investments:

Regular rebalancing is crucial because market conditions and your personal circumstances can change over time. For instance, your risk tolerance may decrease as you approach retirement age. Similarly, economic trends and market performance can impact the performance of different investment options. By rebalancing, you adjust your asset allocation to maintain your desired risk level and investment strategy.

The process typically involves selling some assets and reallocating the proceeds to different investment categories to achieve a target allocation. For example, you might increase your holding in bonds and decrease your stock position if you feel the market is overvalued and want to reduce risk. Conversely, if the market is undervalued, you might rebalance by buying more stocks.

Experts recommend reviewing and rebalancing your investments annually to ensure they align with your risk tolerance. However, the frequency of rebalancing can vary based on personal preference and market conditions. Some investors might choose to rebalance more frequently, especially during periods of significant market volatility, while others might opt for a longer-term approach and rebalance less often.

It's important to note that rebalancing should be done strategically, considering your investment horizon and financial goals. If you have decades until retirement, you might tolerate more risk and maintain a higher allocation to stocks. As you get closer to retirement, you'll scale back on riskier investments and rebalance towards more conservative options.

In summary, regular rebalancing is a critical aspect of 401(k) management, allowing you to adjust your asset allocation and maintain your desired risk level. By staying proactive and reviewing your investments annually, you can ensure they remain aligned with your financial goals and market conditions.

Start investing early

Financial experts advise contributing as much as you are able to, ideally between 10% to 15% of your income, especially when you are young. The sooner you start investing, the less you'll have to save each month to reach your goals, thanks to compound interest.

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.

Most people aren't interested in researching [and] selecting funds for their 401(k), says Charles C. Weeks, a Philadelphia-based CFP. Target date funds will help people avoid blowing up their portfolios by making avoidable mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate their 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, says Howard Pressman, a Virginia-based CFP.

Choose the right mix of investments

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

Experts suggest that you should check that your investments are properly aligned with your risk tolerance each year and rebalance as necessary. 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.

Target date funds will help people avoid blowing up their portfolios by making avoidable mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate their 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.

Someone may find that they would like a more or less risky mix of investments than what's in the target-date fund they are considering. If you have decades until you're going to retire (or take distributions), then you can afford a bit more risk. You might choose an 80-20 stock mix for now. When you're older, you'll start scaling that back, depending on your goals and, again, your appetite for risk.

Financial experts advise contributing as much as you are able to, ideally between 10% to 15% of your income, especially when you are young. The sooner you start investing, the less you'll have to save each month to reach your goals, thanks to compound interest.

Frequently asked questions