Author Archive: monkeyful

401k Starter Guide For New Investors

New participants to 401k plans must quickly learn about proper 401k allocation. The reason is that so much of the success of their retirement can rest on how well their investment decisions are in their 401k plan. Since participants can normally place their funds into several different assets (mutual funds, stocks, bonds, equities, etc.), it is important to know how each one can impact your plan and the benefits of diversification.

Although each 401k plan will have different investment options depending on the specific plan. Generally, you will find that most are with big investment companies like Fidelity where they give you a broad selection of different types of mutual funds like Growth, International, Diversified, Emerging Markets, Small Cap stocks, Mid Cap stocks, Index Funds, Short term investments, etc. The typical 401k plan offered 18 fund choices in 2008.

The conventional wisdom of investing decisions is to put a greater emphasis on stock mutual funds when you are younger and shift more of an emphasis over to bond funds and money market funds as you get older. The reasoning behind this is that when you are younger you can take more risks and should naturally go for funds that offer higher returns. However, as you get older, you should be more concerned about protecting your 401k funds and keeping them in mutual funds and investments that are more likely to offer smaller returns but are safer. Still, you also must recognize the market fluctuations that can occur during recessions like now where all investors should shift their funds to safer investment options like bonds and cash equivalents.

Another aspect to consider is the need for diversification. This is important to help address temporary drops in the market. This diversification should generally be spread out among the three main classes: stocks, bonds, and cash. However, it should also look into the specific variations within each class. You should look at adjusting your holdings into the stronger performing groups in each sector. For example, this may mean having more holdings in small-cap stocks as opposed to large-cap stocks at a certain point in time. Also, you may move funds into an international fund to provide more support. Finally, you may find that your 401k investing options are too limited and need to support your account by making other investment options outside the plan to support. One popular case among investors is to use an IRA account to access foreign investment options that are not available with their 401k. This is designed to give them further diversification and can sometimes be used as an area of growth.

As a new 401k plan participant, you will do well to learn about all the different 401k allocation investment options. Although investment strategies will vary depending on which financial advisor you talk to, the decision on where to put your money will ultimately rest with you. Be sure you are getting sound advice that supports your understanding of your options. These decisions are too important to not take the time to learn how to invest your money wisely.

401k Retirement Plan

401k’s are the most popular form of additional compensation given to employees by companies. Each 401k plan is different for each company. However, all of them allow the employees to make contributions to various assets. These assets can include index funds, mutual funds, stocks, bonds, and even company stock. In most cases, the employers will even match a certain percentage of the contributions made out of each employee’s paycheck. However, 401k’s offer other advantages as well:

  1. The power of compounding and deferred taxes.

The main advantage of 401k’s for employees is that you can grow the money in these plans through investing and defer paying taxes on contributions until you withdraw the funds.

  1. 401k’s are highly portable retirement accounts.

Also, most 401ks are portable allowing you to take them with you once you leave a company. This means you can take the funds and put them in your new company’s 401k without too much difficulty.

  1. Save money for companies.

Employers like it because it is a way of avoiding having to pay guaranteed income for pension plans and provides an alternative to employees for compensation purposes in recruitment. Allowing companies to save money here can often create benefits for workers in other ways, such as a business and job itself, higher salaries, etc.

However, 401k’s are not without some disadvantages as well. Some of their more common detractors include:

  1. Limited investment options.

One of the most common complaints of 401ks is a lack of investing options. This is a particularly contentious one because you have some employees who become overwhelmed with too many choices and want a scaled-down option list and others want to be able to put their funds to work in all kinds of different asset classes.

  1. Higher risk than guaranteed pension plans.

Beyond the concern about the lack of 401k investment options, 401k’s bring a higher level of risk than guaranteed pension plans. Many employees have seen their 401k’s drop significantly in the fall of 2008 showing the riskiness of 401k plans. With reasons like these, there has been a bit of backlash against 401ks although they will likely remain the most popular extra compensation for companies shortly.

With all this said, 401k’s can be a very effective tool in helping people save money toward retirement. However, as with any investment option, you need to give it the due diligence it deserves. The recent drop in many workers’ 401k plan values shows that you cannot and should not implement the strategy of putting your money in a 401k and not following it. Instead, the better advice is to periodically monitor your plan and make adjustments on planned spikes in risk. This will help provide you a greater chance to guard yourself against wide swings in the market even if it does require a little additional work in monitoring your different investment options.

401k Investing Mistakes

The recent economy has created an opportunity for learning for all investors. Despite the access to quality 401k Investing Advice, many investing mistakes have been made that could have been avoided. The good news is you now can take advantage of these mistakes of others so that your retirement plan is better protected. Here, are a few of the most popular:

  1. Loading up on company stock.

This creates a problem where you are increasing your risk to a very high and unreasonable level. You are betting everything on your job and retirement plan on the company and if things go bad, you can lose everything. These employees are the ones who lose the most when the economy goes bad. Part of the blame is the employer pushing their stock on employees where they do not necessarily have the employee’s best interest at heart.

  1. Fail to diversify their funds among various asset classes.

Diversification is important to help reduce the risk of losses on any one investment class. Although this diversification changes depending on market conditions, diversification is one of the better strategies to help protect investors for long-term investing.

  1. Fail to check benefits plan for mistakes.

Many people fail to realize that mistakes can easily be made regarding contributions you wanted to be made or how you wanted the assets to be allocated. For this reason, it is a good idea to review your information on the personal benefits statements to make sure your information is accurate.

  1. Fail to buildup an emergency reserve.

An emergency reserve fund is simply money set aside in a savings account to pay for emergencies like car repairs. It should have about 3 to 6 months’ worth of living expenses in it. The failure of having an emergency reserve causes many people to have to borrow or withdraw from their 401k plan. This measure kills the advantage of compounding and can potentially invoke early withdrawal penalties. You should not invest in a 401k plan until you have established an emergency reserve fund. This is one of the most important rules in 401k investing advice as it provides a base for all your investing.

  1. Fail to move funds to safer options when bad news starts appearing.

In the two recent recessions of 2000 and 2008, many people failed to act quickly to the bad news appearing in the market. This resulted in greater than necessary losses whether it was due to a lack of appreciation for the impact of the news or indifference. This is one reason why it is so important to keep up to date on the market and how your funds are allocated. 401k participants should not be afraid to move funds to cash investments like a money market fund when bad news starts to appear. This can help safeguard your funds against everything but inflation.

  1. Relying only on your 401k plan as the sole retirement plan.

This is a dangerous game to play because most 401k plans do not offer enough options for the best gains and diversification. For example, if your 401k plan fails to have an international fund, this creates a potential problem as you will have limited opportunities to protect your 401k funds across the board in times of higher home inflation. Instead, it is a very good idea to make other investment options that can supplement and support your existing 401k. In this case, you should consider investing in other investments that allow you to potentially have access to an international fund. Other retirement plan options can range from investing directly in stocks, or mutual funds, or using IRAs, Self Directed 401ks, or Roth 401ks or Roth IRAs.

By avoiding these common investing mistakes, you can help increase the odds of making good decisions. The best 401k investing advice will always be to learn from the mistakes of others so that you will not make the same mistakes in your own investing.