Summary
When considering choices in which to invest money in your 401(k), keep in mind:
- Investments in a 401(k) should be part of your overall investment strategy. To learn more, see: Investments.
- Consider the likelihood that you may need funds because of your health condition [both as to amount(s) and timing], as well as the possibility of decreased income and/or increased expenses.
- 401(k) plans are not appropriate for investments which generate income-tax-free earnings.
Revisit your investments at least once every three months to stay in line with your needs and desires.
If you need help making investment decisions, including how to invest assets in a 401K plan, there are credible sources of advice available which are described below.What To Invest Your Money In
When determining how to invest your 401K assets, it is advisable to keep the following in mind.
- Investments in your 401K plan grow tax-free. Because of this, investments that provide a tax-exempt return (such as municipal bond funds) are usually not appropriate investments for a 401K plan.
- A 401K plan is well-suited for high-growth and income-producing stocks. If you have both a 401K plan and taxable savings or investment accounts, consider using the 401K plan for a greater proportion of your growth investments and keeping your less-risky savings in your personal accounts. If you suddenly need access to funds, the chances are that you'll lose less by accessing personal accounts versus a 401K.
- As a general matter, it is not advisable to stop investing during a down market. When you invest consistently, you are doing what is known as dollar-cost-averaging. If you continue to make regular contributions during a down market, you purchase more of an asset than when the market is up. You buy less of the asset when the market is up. Also, large market gains tend to happen in a day. If you miss the day, you miss the large gain.
- Consider diversifying if you have a large percentage of your financial capital (your investable funds) in the stock of the company for which you work. You already invest a large percentage of your human capital in the company. As the old adage says: It's not good to keep all your eggs in one basket.
- The investment in your 401K should be considered to be a part of your overall portfolio. To learn more, see Investments.
The number of times you can make changes to how your money is invested. While some plans allow you to move money around on a day-by-day basis, others allow changes only monthly, quarterly, or yearly.
The following chart provides food-for-thought about many of the investment options that your 401K plan may offer. Check your plan about the options you prefer. .
|
Name of Investment |
Pluses |
Minuses |
Time Period For Which Appropriate |
|
"Fixed" fund, "guaranteed," fund, "stable-value" fund. (Usually backed by insurance-company contracts) |
Low-risk with guaranteed return. |
Fixed earnings and inflation can make your money worth less over time. |
These investments are useful if you think you might access the account in less than 5 years, since your principal is secure and doesn't fluctuate in value. Not recommended for the long-term because of the long term likelihood of inflation. Tax exempt investments do not take advantage of tax-deferred savings. |
|
Employer Stock |
Acquire ownership interest in the Company |
Could put too many eggs in one basket. If your company doesn't do well, your income may be in jeopardy as well as your investment. |
Long-Term only (such as 5 years or more). |
|
Mutual Funds |
Money will automatically be diversified. |
The mutual fund company may charge fees. |
Depends on type of fund (see below) |
|
Bond Mutual Funds |
Safer and less risky than Stock Mutual Funds |
Lower return on your money. Values are sensitive to changes in the interest rate |
Keep in mind that bonds often "move" in a direction opposite from stocks (when stock prices rise, bond prices often fall, and vice versa). Everyone should consider having some bonds or bond funds in your portfolio. |
|
Stock Index Funds |
Low-risk, as far as stocks go. |
Not actively managed. They follow the overall market. |
Often recommended for medium to long-range of 3 years or more. Not advisable if money will be needed in short term because of the volatility of stocks. |
|
Growth and Income Funds |
Generates income. Less risky than pure growth stock funds. |
Like any stock investment, more risky than investment such as bonds. Greater chance of higher fees. |
Frequently used for medium to long-range investments of 3 years or more. |
|
Growth Funds or Aggressive Growth Funds |
Highest potential return, both over the short and long run. |
Greatest chance of losing money in the short term. Risk of losing large amounts of your investment. |
Should be used ONLY if you don't expect to touch your money for at least 5 years. |
|
International or Global-Equity Funds |
Can help diversify your overall portfolio by including non-US funds. |
Risky. Can be impacted by political events or worldwide economic downturns. |
Should be used ONLY if you don't expect to touch your money for at least 5 years. |
|
Balanced Funds |
Built-in diversification. Less risk than an all-bond funds. Higher return than an all-stock fund. |
Riskier than bonds. Less potential for growth than a fund of only stocks. |
To be considered if you are investing for a period of at least 3 years because stocks and bonds often "move" in opposite directions. |
|
Money-Market Funds |
Lowest risk, stability of principal. |
Like all of the above, not insured. |
Consider keeping your money in this type of fund if the money will be leaving the account for any reason within the next 24 months. Could be used as part of any portfolio. This option has low risk of dropping in value if you need to pull the money out of the account. To learn more, see: How To Deal With A Financial Crunch. |
Sources of Investment Advice
There are many ways to get information advice about investing, free or for a fee - each of which should be used with caution - particularly if the advisor has a financial stake in your decision.
Experience indicates that the most informed advice tailored to your situation is likely to come from a financial planner, preferably one who is certified and works on a fee basis. While you will pay for the advice, a certified planner is ethically bound to look at how any investment advice he or she gives you fits in with your overall financial situation. Even more importantly, such a person has the necessary knowledge and experience Preferably look for a planner with intimate knowledge of the ins and outs of living with, or after successful treatment of, a chronic or life challenging condition.
Options include:
- Newspaper articles. In addition to current articles, you can access older articles on line such as from the New York Times (www.nytimes.com
) or the Wall Street Journal (www.wsj.com ). Look for basic advice instead of trends. - Consumer magazines such as KIPLINGER'S PERSONAL FINANCE, and MONEY. Likewise, look for basic advice.
- Technical publications such as MORNINGSTAR or VALUE-LINE. Technical publications can be costly and difficult to understand.
- A financial advisor (also known as a stockbroker). Caution: even though your stockbroker can't earn commission on funds in your 401K, his or her advice might still be skewed toward the products with which he or she is most familiar.
- Your bank. Caution: a banker's advice may be more generic than personalized unless you keep a lot of money in the bank.
- Discussions with family, friends or relatives who are experts in the subject. Beware of talking with people close to you who have more advice than expertise.
- Your employer's human resources department. Employers can now provide specific, retirement investment advice although they are not required to do so. Keep in mind that employers are generally not liable if the advice doesn't work out. Caution is particularly advisable if the employer recommends its own stocks or bonds.
- Financial Websites such as www.morningstar.com (click on "Personal Finance" then on "401(k)s). Even if all you use is a site's calculators, it will help you make reasoned forecasts based on estimates of future earnings on your investments.
- A financial planner (If you don't have a financial planner, see: How To Choose A Financial Planner).
