subject: How To Manage Your 401k Safely And Profitably [print this page] As the genius investor Warren Buffett once said: "The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1."
Managing a 401(k) plan is first and foremost about making sure that you have money upon retirement. It's not supposed to be a vehicle for getting rich.
Your 401(k) money should be invested conservatively and intelligently while abiding by time tested investment principles.
Your goal shouldn't be to try and beat the market index nor should it be to earn extraordinary returns. The surest way to lose all your money is to try and double it.
Instead, your goal should be to earn a good return on your money for a sustained period of time. Do so and your money and your financial security will multiply.
Here's how to manage your 401(k) plan safely and profitably.
==> Never Invest in Your Own Company's Stock
A lot of people choose to invest in their own company's stock. This is not a good idea.
Why? Well, if your company continues to grow, that's fine. But if your company takes a downturn, you're at a double risk.
Not only is your livelihood at stake from possible layoffs, but so are your investments.
In other words, you risk taking a double blow from any downturn in the company. It's not worth the risk.
==> Try to Max Out Your Employer Match
If your employer offers to match a certain percentage of your 401(k) plan, do everything in your power to take full advantage of that offer.
For example, most corporations will match half of your contributions, up to 6% of your salary. So if you're earning $3,000 a month, that's $180 a month they're willing to match. As they're willing to match 50%, that's $90 they'll contribute to your account.
This is free money. Free money that'll compound for the rest of your life.
If you're not taking advantage of employer 401(k) matching, you're literally leaving free money on the table.
==> Pay Attention to the Economy, But Never Make Short Term Decisions
The economy can go up or down, but your core investing strategy shouldn't change. Yes, you can change your allocation strategy by 10% to 20% at times, but never make decisions based on trying to earn short term gains.
For example, let's say you had a 60% stock and 40% bond allocation in 1998. Because the whole tech market was rocketing up and the stock market seemed like it was about to take off, you decide to switch to 100% stock for a short period of time.
We all know what happened. The market crashed, decimating many people's savings.
Yes, market conditions matter. But your decisions should by and large be on an overall strategy rather than short term decisions.
==> Re balance Your Portfolio
Re balancing your portfolio is an important part of managing a 401(k) plan.
If a certain part of your portfolio outperforms another part for a period of time, your portfolio will be unbalanced.
For example, let's say your ideal balance is 60% stocks and 40% bonds. However, for a 5 year period your stocks outperformed your bonds.
As a result, you now have 70% stocks and 30% bonds. However, just because stocks outperformed bonds in the last 5 years really doesn't have an impact on long-term statistics and you still believe that a 60-40 split is the best allocation.
So you need to reallocate.
Always be on the lookout for when your portfolio is out of balance. It can creep up on you if you're not careful.
Managing a 401(k) portfolio safely and profitably isn't rocket science. All you need is basic knowledge and most importantly the self-discipline to stick with a proven strategy.
