Investing money in your 401k need not be a stressful thing. Here’s a real simple investment strategy to lighten your load and help you make money with less risk.
First, decide whether you want to be conservative, middle-of-the-road, or aggressive when investing money in your 401k plan. THINK before you make your decision, because aggressive investing means more risk; and conservative means less potential profits. You must be comfortable with this decision before you put together an investment strategy.
Now, let’s get to the easy part and assume you want to go middle-of-the-road or moderate. You need an investment strategy. This means that you pick the investment options you want to invest money in, and what percent goes to each. After you’ve done this you need an investment strategy for managing your portfolio over time.
So, you decide to invest money as follows: 40% to domestic (U.S.) stock funds, 20% to international stock funds, 20% to intermediate-term bond funds and 20% to the safe stable account (or money market fund if your plan does not have one). This is called your asset allocation for contributions. This is how the money they take out of your paycheck is invested.
If you already have funds in your account, have them switch you to the above percentages.
Now, here’s the important part if you want to make money over the long term without much effort or stress. Over time, some of the investment options you picked to invest money in will do better than others; and some will be losers from time to time.
For example, in 2008 virtually all stock funds lost money because the stock market tanked. Investors in 401k plans without a sound investment strategy did not make money … they lost big bucks. On average they had about 60% of their money in stock funds and just let it ride.
Here’s your investment strategy. You rebalance your assets periodically. If your stock funds take significant losses, move money from your other investment options to bring your stock funds back to 40% of the total. Ditto, your other investment options. The important thing is that you don’t let your percentages get out of line.
In our example you decided to invest money like this: 40% … 20% … 20% … 20% in the various investment options. Rebalance when necessary to keep these percentages within a few percentage points of your original targets. By doing this you automatically take advantage of swings in value of the various investment options.
For example, stocks got nailed in 2008 but rebounded 50% from March to September in 2009. Had you rebalanced when stocks were down, you’d have made up for much of your previous losses.
Here’s the really good news for some of you. Many 401k plans offer automatic rebalance service. You just tell them how often you want to rebalance (like once a year) and they do the rest for you, automatically. If this is available, take advantage of it. Few 401k investors do, probably because they know nothing about it. Now, you do.
By: James Leitz
About the Author:
First, decide whether you want to be conservative, middle-of-the-road, or aggressive when investing money in your 401k plan. THINK before you make your decision, because aggressive investing means more risk; and conservative means less potential profits. You must be comfortable with this decision before you put together an investment strategy.
Now, let’s get to the easy part and assume you want to go middle-of-the-road or moderate. You need an investment strategy. This means that you pick the investment options you want to invest money in, and what percent goes to each. After you’ve done this you need an investment strategy for managing your portfolio over time.
So, you decide to invest money as follows: 40% to domestic (U.S.) stock funds, 20% to international stock funds, 20% to intermediate-term bond funds and 20% to the safe stable account (or money market fund if your plan does not have one). This is called your asset allocation for contributions. This is how the money they take out of your paycheck is invested.
If you already have funds in your account, have them switch you to the above percentages.
Now, here’s the important part if you want to make money over the long term without much effort or stress. Over time, some of the investment options you picked to invest money in will do better than others; and some will be losers from time to time.
For example, in 2008 virtually all stock funds lost money because the stock market tanked. Investors in 401k plans without a sound investment strategy did not make money … they lost big bucks. On average they had about 60% of their money in stock funds and just let it ride.
Here’s your investment strategy. You rebalance your assets periodically. If your stock funds take significant losses, move money from your other investment options to bring your stock funds back to 40% of the total. Ditto, your other investment options. The important thing is that you don’t let your percentages get out of line.
In our example you decided to invest money like this: 40% … 20% … 20% … 20% in the various investment options. Rebalance when necessary to keep these percentages within a few percentage points of your original targets. By doing this you automatically take advantage of swings in value of the various investment options.
For example, stocks got nailed in 2008 but rebounded 50% from March to September in 2009. Had you rebalanced when stocks were down, you’d have made up for much of your previous losses.
Here’s the really good news for some of you. Many 401k plans offer automatic rebalance service. You just tell them how often you want to rebalance (like once a year) and they do the rest for you, automatically. If this is available, take advantage of it. Few 401k investors do, probably because they know nothing about it. Now, you do.
By: James Leitz
About the Author:
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.