Your 401k best investment strategy for 2010 and beyond depends on the investment options in your 401k plan. Regardless, with a sound investment strategy any 401k investor can be a winner. Few people understand investment strategy or their investment options, so here we make it simple for you.
Millions of investors lost money in the “lost decade” of 2000 through 2009. It was a tough time to invest. Without a simple yet best investment strategy in 2010 and beyond, investor losses could continue to pound the uninformed 401k investor in the future. So, let’s start on page one and put together a sound investment strategy for people who know little about investments and investing who invest in a 401k plan.
First, look at the 401k investment options AND features available to you. If your plan offers TARGET funds, a safe STABLE ACCOUNT, and a REBALANCE feature you’ve got it made. If not, you’ll need to work a little harder to maintain a balanced investment portfolio. the secret to long term investing success. We assume here that you want to be a moderate or middle-of-the-road investor. In other words, you want to put your money to work to make a better return without taking much risk.
Let’s start with the easy way: your plan has target (retirement) funds, a stable account that is safe and pays interest, and a rebalance feature. First pick your target fund. For example, if you plan to retire in about the year 2040 pick target fund 2040; or target fund 2020 if that’s when you expect to retire. Now set things up as follows: of your new contributions AND of your existing fund investment assets (money) goes into your target fund. The other half goes into the stable account. Then, elect to participate in the automatic rebalance feature.
It’s that easy to put what I consider to be your best investment strategy into action. Here’s how it works. Your target fund works to make your money grow by investing primarily in stock funds and bond funds with the remainder in a safe money market fund. It will fluctuate in value and is your growth engine for making higher profits over the long term. Hence there is risk here.
As you get older your target fund automatically adjusts to a lower risk profile. You don’t need to change a thing. The stable account offsets your overall risk because it is safe and pays interest. Together, these two investment options give you a balanced portfolio offering you a higher return at only a moderate level of risk. Now, in extreme circumstances as in 2008 and 2009 portfolios get out of balance due to extreme fluctuations in the investment markets.
That’s why it is extremely important to go for the auto rebalance feature in your plan. For example, you might elect to have your investment portfolio rebalanced once a year at the end of each year. In our example that would mean that once a year your plan would move the money in your 401k account between the stable account and target fund so that was again in each as you had originally intended it to be.
Example: At the end of 2008 your target fund would have lost money for the year, since the stock market tumbled; and your stable account would have grown. Auto rebalance would have taken money from your stable account at year end and put it into your target fund to make them both equal again. At year end 2009 you had a nice profit because stocks (and your target fund) had a good year. At that point rebalance would again kick in and move funds from the target fund back to the stable account to even things up again.
If your plan does not have a stable account, substitute with the money market fund option. If target funds are not offered go with stock funds and bond funds. If auto rebalance is not available do it yourself by moving money once a year to put things back in line. For example, set yourself up with going to the money market fund and the rest split equally between bond funds and stock funds to be conservative. To be more aggressive go 1/3 each in the money market fund, stocks funds and bond funds.