Putting money into your 401K at an early age is a fantastic idea. And if you did this, then you are probably in great shape. But when you started investing into your 401K, how much risk were you willing to take when it came to stocks vs bonds? Did you invest your money too conservatively? Did you invest your money to avoid losing it, or did you invest to maximize your returns?
The beauty of 401K auto rebalancing
A few years ago my employer offered up a new 401K fund that auto re-balances our funds based on how old we are. This new helpful investment idea takes all of the guesswork out of stocks vs bonds. When we filled out our 401K paperwork, we told them how old we were. They automatically balanced our portfolio between stocks vs bonds based on our age. If we were young, then most of our 401K went into higher risk stocks automatically. And as we got older, the fund would automatically shift our investments into less risky bonds.
A few short years later, my portfolio shot up like a rocket. My 401K was now investing into higher risk stocks that I was too timid to invest in. Granted, my 401K balance goes up and down like a yo-yo. But over time, it has grown way beyond my expectations.
Talk to your company’s 401K investment broker
I recently took another job, and every moment I get, I meet with our company’s investment broker and plead my case for automatic rebalancing. At this moment, unfortunately, we do not have any choice on where our money goes. But as most 401K’s go, my new employer still matches my contributions – so it’s still a good investment.
When I left my employer and took another job, I left my money in my old 401K rather than roll it over. It’s still way out performing my other investments.
Most of us are investing too conservatively
Wells Fargo just recently published a report showing most of us are investing our 401K’s too conservatively. Their report shows 60 percent of us are investing to protect our investment, rather than grow our investments. Perhaps it’s because we got the gitters because we took heavy losses after Y2K, or took even more losses after the housing crash of 2008.
Some of us remember those big losses. But remember, the stock market shot up to the moon before Y2K, and shot up again shortly afterwards. Even today, the DOW has shot up as high as 19,000 after the election. If our 401K was set to automatically adjust our investments based on our age, we would have cought these upswings (as well as the downswings).