What Should My 401k Be Invested In Right Now – A few weeks ago I talked about why we should invest. Today I want to talk about company-sponsored retirement plans, which is how most people approach investing. Specifically, how would he choose the investment funds that are allocated to him.
Investing in your first 401k (or 403b/457 for nonprofits and government) can be great. Everyone tells you to do it, but no one tells you
What Should My 401k Be Invested In Right Now
Really Maybe you’ve read all about “asset allocation” and how “index funds” are the bees knees. Doing research is a big step, but for many of us it’s different when you need to apply information to a real-world situation. Because when you first log into your 401k account to set it up, you get a jumble of letters like this:
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With so many 401k fund options to choose from, how do you know which one to choose? And if you can’t interpret all the gobbledygook on the chart, how do you know which numbers to look for and which ones are just a smoke screen?
I used to be in the same boat as you. I was excited to participate in my first 401k. It was easy to calculate how much I could add to that. But then I had to figure out which investments to choose. Armed with what’s called a “prospectus,” a PDF that describes each available option, I spent an hour Googling each option to determine which would make me the most money.
But I don’t waste my time going through all the options anymore. Now I look for details and narrow down my options through a process of elimination. All together it takes about 15 minutes.
Today I’m going to walk you through that process, using a real example of real funds that we can explore. I’m not going to explain all the terms because I honestly don’t think it’s necessary to know them all to do a good job. At least I don’t.
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Disclaimer: I am not a financial professional. This post describes the factors that I would personally consider when choosing my own investment options. Do your own research before making any investment choices.
Ninety-nine percent of the time I would encourage you to act like my mom. This is the only time I advise you not to.
My heart sank when I found out my mom had invested 100% of her 401k money in a money market fund for years. That’s right: you invested in zero stocks. Someone who has no idea about the job for a moment should tick that box for her. Money market funds are the most conservative mutual fund option and are comparable to cash investments in terms of returns. It’s painful to think how that money could grow.
If you invest in a 401k, you plan to retire, which I believe will be decades away. You have time to recover if the market falls, so you can bear more risk.
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The one marked “Short Term” in the Asset Class column? I would ignore it, or at least not invest a significant portion of my money in it.
You can’t control the performance of your investments, but you can control what you pay to invest. Yes, investing costs money. You pay annual fees, an “expense ratio,” based on a percentage of assets. That’s why I ignore metrics like past performance and ratings and just pay attention to the Expense Ratio column (in green below).
Looking at the chart, paying a fee of 0.84% doesn’t seem like much, and the most expensive option in the sample, 1.02%, sounds perfectly reasonable. But fees can make a big difference in your returns.
When comparing expense ratios, also pay attention to the decimals. At a glance, 0.7% and 0.07% can easily look the same.
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Let’s see how those charges might play out over time. If you started with $10,000 and invested $5,000 a year for 30 years at a 6% return, here’s what each would cost you.
A difference of 0.63% could cost you nearly $50,000 more over a 30-year period. For me, anything above 1%
. Generally, my fund benchmarks are those that cost less than 0.5%, but it all depends on what options you have in your 401k plan. If many of them are expensive, you may have a bad 401k plan.
In addition to expense ratios, there are other costs you may incur, such as start-up costs and redemption costs, but they are not in this particular example. Anyway, I avoid that.
Best Index Funds For A Diversified Portfolio In August 2023
Calculating benefits can be complicated, so all my investment accounts are connected to Personal Capital, which has a helpful tool for analyzing retirement costs. Below you can see how much I pay per fund per year.
And below is another photo of my Personal Equity account where you can see how my annual fees compare to the benchmark and how much I would lose in fees over a longer period of time.
By ignoring the high-cost options, we are now down to about 7 of the original 30 funds. There are four in particular that I like, highlighted in green. These are called index funds. Funds are either ‘passively managed’ or ‘actively managed’. Index funds are passively managed and not only cost significantly less, but consistently outperform actively managed funds.
How to know which is an index fund? They usually have very cheap fees, less than 0.1%, and the fund names contain the word “index”.
The Solo 401k Benefits
Looking at the Asset Class and Category columns, we now have three different types of equity funds with one remaining bond fund:
Now you need to allocate percentages to the funds you choose. You can choose a background, or a combination, as long as everything is 100%. How you allocate your portfolio is an important part of your strategy and depends on your level of risk.
By way of illustration, the following chart shows typical returns based on different allocations. The far left is the most conservative, with 100% short-term investments (which is what my mother did). With a conservative portfolio you don’t get really verifiable returns. And on the extreme right is the most aggressive portfolio, mostly in national securities and some in foreign securities. If you have 100% of your portfolio in stocks, you have the best opportunity for growth…but you may not be able to deal with stock market fluctuations.
Returning to our four options and matching the categories to the chart, we have two domestic stock indexes, a foreign stock index, and a bond index to mix and match.
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Note: I use charts as a guide, not as an exact formula for building my own portfolio.
A general recommendation is to make sure your portfolio contains stocks and bonds. There are many quizzes that can help you figure out how to split your portfolio, like this one from CNN, although I think most of them are too conservative.
Since I have decades before I touch the money, I go for aggressive growth. And because I value simplicity, I would choose only a few funds. And this is what I would choose:
Most people would also add some foreign stocks, but I prefer to use another brokerage account for that. For my 401k, I like to keep it very simple since the options are limited.
Make Your 401(k) Plan Fit Your Needs
Choosing your own risk allocation can be intimidating. As I mentioned, there are tests like the CNN quiz I linked above, or you can link your investment accounts to Personal Capital and it can recommend allocations like the one below.
By focusing on a few key concepts, investing doesn’t have to be as complicated as it seems. And if you can figure it out for your 401k, then you can figure it out for the investment accounts you open yourself. In retrospect, there are several factors to consider:
Hope this post was helpful! And if you’re interested in trying out the Personal Capital app I mentioned for free, you can sign up here and we’ll both get a $20 bonus. win-win
There is no right or wrong way to invest, so I’m curious about different approaches. What factors do you consider when choosing your 401k investments? Since financial documents have gone paperless over the past decade, most of us neglect to review them regularly. Periodic pay statements, monthly bills, insurance policies and investment account statements are invisible because many of them are only accessible online. We often ignore retirement plan statements until the stock market crashes, usually when it’s not appropriate to make investment changes.
Tapping Your 401(k): Is Now The Right Time To Do It?
The statements are full of financial jargon and exposition that we can ignore, but they can also provide valuable information about our progress in and during retirement. In preparation for this article, I reviewed 401(k) statements from 10 different companies to share how you can interpret your own statements. You can open your account statement or follow our shared example. Jump right in!
At the top of the statement: you will see your personal contact details,
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