If you have ever felt like using a dart board to pick your 401(k) investments might work as well as your current strategy, it may be time to learn how to invest your 401(k) money more effectively. 401(k) plans give you options among many different funds provided by your employer. Although every 401(k) has different options, there are still some basic steps you can follow to use your 401(k) plan to put you on the road to a successful retirement plan.
Write down your goals. The National Endowment for Financial Education recommends that all investors begin a savings plan by detailing a desired time frame and a list of goals they want to achieve. This process will help you create actionable, realistic retirement goals to drive your 401(k) investment decisions.
Calculate how much you’ll need for retirement. Use a online calculator to help you find out what rate of return you’ll need to achieve your retirement goal. This will help you eliminate many of the choices in your 401(k) that have not historically been able to provide the returns you need.
Search your 401(k) plan for investment types that have provided the returns you need. Your human resource department can provide a prospectus for every fund in your 401(k) that will show historical returns and detail the types of investments in each fund. Look toward stock and real estate funds for good long-term returns. International and small company stocks are more risky than large and mid-sized stocks. Bonds return less than stocks but experience less volatility. Money markets and guaranteed accounts are great for short-term goals because they don’t experience volatility. However, these investments rarely beat inflation.
Diversify your investment selections among a few different types that have achieved your goal. Although financial advisors differ on their advice around how much should be in each type of investment, they agree that you should choose an array of mostly stock funds of different types for your long term goals. As you approach your goal, you will want to use an increasing amount of bonds, money markets and guaranteed accounts to reduce volatility in your 401(k).
Monitor your returns. Use some of the tools available online to check your results. Don’t panic when your investment loses money if your goals are long-term. Review your fund’s performance against it’s peer group. If the fund isn’t performing well against it’s peers, consider changing to a fund with a better track record. Review your funds at least once a year to decide if your risk needs have changed, your investments are correctly allocated and if your investment strategy should be tweaked.