Four more ways to turbocharge your 401(k)
Reprinted courtesy of MarketWatch.com
Published: March 27, 2013
To read the original article click here
In my three most recent columns I’ve described 17 ways you can get the most from your 401(k) or similar employer retirement program. Here are four more simple steps that smart investors take to harness the full power of their accounts.
One: Invest in index funds. This one step lets you accomplish multiple goals all at once. You reduce your expenses, leaving more of your money for you and giving up less of it to Wall Street. You reduce your asset turnover, another way of keeping your expenses down.
Index funds will increase your diversification, which I believe is your best long-term companion as an investor. And there’s no better way to control the exact asset classes in your portfolio.
What if your 401(k) lacks index funds in some important asset classes? If you can, buy exchange-traded funds (ETFs), most of which will give you the advantages of index funds. Otherwise, remember that if you have access to an asset class (small-cap value stocks, for example) only through an actively managed fund, it’s more important to have that asset class than to hold out for only index funds.
Two: Make your contributions automatic and don’t quit contributing just because there’s a bear market. In fact, you’ll get the most for your investment dollars when you can buy valuable assets at lower prices.
What I’m describing is dollar-cost averaging, a tried-and-true way for long-term investors to buy assets at below-average per-share prices. This practice can be emotionally difficult if you have to make the decision (invest vs. don’t invest) each time. Give yourself a break and make the one-time decision to save regularly regardless of what’s going on in the market.
This is just smart, and it’s an easy way to do the right thing without having to think about it.
Three: Save, save, and save even more. I can’t give you many guarantees, but this is pretty close: When it comes time to retire and start drawing on your savings, you will NOT regret that you saved too much money. You will be glad for every dollar, and if anything you will wish you had saved even more.
If you cannot afford to save the maximum allowed by your plan, be sure to state your desired contribution as a percentage of your pay instead of a dollar amount. That way, whenever you are fortunate enough to receive a raise or a bonus, you’ll automatically set some of it aside for your future.
You know that’s the right thing to do, and this is how to do it easily and painlessly.
Four: Don’t expect the investment skies to be constantly sunny. I know the stock market has been very kind to investors lately. And I know bonds don’t pay much these days. But I also know (and you know, too) that the markets go up and down.
Stock prices have declined without warning so many times over the years that only a fool would invest as if this won’t happen again. Design your portfolio so it remains within your risk tolerance. This is a big topic, which I’ll tackle in a future column. For now, here are a few important points.
In general, young people should take more risks than older people. In fact, most investors under 35 or 40 probably can stick with all-equity portfolios as long as they diversify properly. Most retirees, on the other hand, should have a healthy percentage of their portfolios in bond funds, because they cannot bounce back from adversity as well as younger folks.
In broad-brush terms, between age 35 and retirement, most investors should gradually add bond funds to their portfolios.
Knowing exactly what that percentage should be is not rocket science. Your goal should be to get into the ballpark (and stay there).
Here’s a well-worn rule of thumb that will get you there: You know how old you are in years. Use that number to determine the percentage of your portfolio that should be in bond funds.
This rule is easy, but it’s probably too conservative for young investors, who need long-term growth much more than the comfort of bond funds. And it may be too conservative for some seniors, who also need growth to keep up with inflation. But this rule is a lot better than nothing.
This wraps up my series on 401(k) investing. In just four columns that didn’t cost you a penny, I have given you 21 ways to harness your employee retirement program.
If you’re a younger investor, these suggestions could literally mean millions of extra dollars in your account when it’s time to retire. If you’re already retired, these suggestions will still put more dollars in your pocket and more peace of mind in your psyche.
If there’s a better deal anywhere than this, I don’t know what it is.
Richard Buck contributed to this report.
Purchase on Amazon
Sound Investing Podcast