- Take full advantage of your employer match – If your employer matches 50% of your contributions up to 6% of your salary, that’s an immediate 50% gain on your investment. Try beating that elsewhere.
- Select your plan’s cheapest funds – 401k plans are notorious for offering expensive, sub-par investment options. This is especially true of the smaller plans. If that’s the case with your employer’s plan, seek out the the cheapest option available and stash the majority of your contributions there. Most plans offer at least one or two relatively inexpensive index funds in addition to a slew of over-priced actively-managed funds with little chance of beating the market. Stick to the index funds in your 401k and round out your allocation with funds in your IRA or taxable account to achieve your desired asset allocation. This isn’t to say there are no good actively-managed funds, but your 401k probably doesn’t have them.
- Make a plan – Buying mutual funds without an investment policy and target asset allocation is more like gambling than investing. This means deciding how to divide your portfolio between stocks and bonds and sticking to it through thick and thin. Your asset allocation, or your ratio of stocks to bonds, will determine over 90% of your portfolio’s return. Here’s my asset allocation.
- Rebalance Regularly – Annual rebalancing helps you buy low and sell high year in and year out. Whenever stocks or bonds are cheap, you will automatically buy more of that asset class at low prices. Whenever they are expensive, you will automatically sell high.
- Stay the course – More than anything else, investment success depends on you sticking with your plan in all market conditions. If you panic after suffering losses, you will probably end up selling low and locking in your losses. Even worse, you will miss out on future gains. Once you’ve made a plan and picked an asset allocation you’re comfortable with, it’s best to stick with it rather than constantly try to switch in and out of different mutual funds.
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