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You know that investing in your 401(k) is vital to your continued financial security, but you may be confused by the myriad of investment choices and options currently available. If you find yourself currently in a quandary over how to best invest your 401(k), these simple tips can help you make an intelligent decision and avoid common investing mistakes.
Tip #1: Diversify:
Different types of mutual funds offer other 401(k) investment options, and your financial planner will be able to help you select the ones that best meet your investment needs. When you meet with them, ask about investing in a self-directed IRA, which allows you to spread out your 401(k) investments as you see fit.
Tip #2: Broaden your 401k Investment Horizons:
It may be easy to invest your 401(k) in only local or national markets. Still, if you do, you could be missing out on an investment windfall since global investment diversification has shown to increase investment holdings by as much as 30% annually. A smart and prudent strategy is to invest about 30% of your money in international holdings-more if you feel comfortable doing so.
Tip #3: Think Carefully Before Investing your 401k in Company-Owned Stock:
While this type of investment may sound like a win-win situation, don't forget about what happened to certain Enron stockholders after the break-up of that company. Investing some of your 401(k) in your company's stock, roughly 10%, should be sufficient enough and will ensure your 401k security if the company's stock values take a turn for the worst.
Tip #4: Be Aware of Hidden Fees:
The majority of company-sponsored 401(k) investment plans don't contain hidden fees, but some do, and you must find out if yours is one of them. Another thing to consider is whether your plan, like most, offers no-load mutual funds. If not, you will need to be exceedingly cautious about 401(k) investment to avoid being charged for investing and subsequently withdrawing funds.
Tip #5: Bigger is Not Always Better:
Believe it or not, investing in smaller companies usually yields more significant returns than investments made in extensive company stock. This is because many investors focus on large-cap growth funds only. By diversifying your portfolio, you can invest in rapidly expanding companies, as well as those governed by the S&P 500, and reap the benefits of a diversely invested 401(k) when you need it the most.
Your Choices Shape Your Future
Retirement should be a time to relax and enjoy the benefits of a lifetime of hard work and smart financial strategies. Even if your retirement seems as though it is light-years away, it is never too early to begin investing in your 401(k). Prudent investment of your 401(k) today will help you to achieve the goal of a more secure financial future.
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