It can be quite appealing to scan your list of funds, choose a handful that has done the best over the past several years, and then call it a day. However, we want to stress that previous performance is not always indicative of future results, which is a statement that appears in virtually every financial disclaimer. Just though a fund has performed well over the past few months or years doesn't guarantee future success.
Also, you shouldn't consider your 401(k) as a silo. Your actions must be considered in the broader context of your financial objectives. This includes the sorts of funds you choose and your stock-to-bond investment allocation. There are risks associated with any investment. You want to be able to achieve your financial objectives and still get a good night's sleep.
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All things considered, we generally choose index funds over single equities or actively traded funds. Search for funds that have extensive U.S. exposure. Also, exposure to other countries can help you keep diversified. Bonds should also be considered since, with some exceptions, like those that have occurred over the past year or two, they frequently serve as "shock absorbers" when the market is down.
If you are totally overwhelmed, check to discover whether your 401(k) plan has a Target Date Fund. This fund "glides" toward the year of your retirement. The risk will decrease closer to that day (in theory). A Target Date Fund is a terrific place to start, but if you're less than five to ten years away from retirement, you should seek out personalized retirement counsel for your unique circumstances.
Don't let your 401(k) investment options overwhelm you. Make it straightforward and take into account having a fiduciary financial advisor examine it.
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Using this money for an emergency reserve may appear tedious at first glance. But that's fine. An emergency fund is meant to be dull. It's supposed to be there to help you out anytime you need it. The furnace fails. Your vehicle requires brakes. You unexpectedly visit the emergency room.
Yet, according to a recent Federal Reserve Board survey, 32% of Americans are unable to handle a $400 emergency bill. And do you know what occurs when someone doesn't have enough money to cover an unforeseen expense? It is charged to the credit card. Thus, break the loop and start saving for emergencies. We recommend having enough money in your account to cover at least three months of your most important living costs (six months is even better).
Please don't get us wrong. Paying down credit card debt should be a top focus. But for now, good advice is to save that refund money as a reserve in case of an emergency.
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Consider factors such as your investment goals, risk tolerance, time horizon, and the investment options available within your 401(k) plan.
Common investment options include mutual funds, target-date funds, index funds, bond funds, and company stock.
Assess your risk tolerance by considering factors like your age, financial goals, and comfort level with market volatility. Conservative investors may prefer lower-risk options, while aggressive investors may opt for higher-risk options.
Target-date funds are diversified investment funds designed to align with a specific retirement date. They automatically adjust their asset allocation over time, becoming more conservative as the retirement date approaches.
Investing a significant portion of your 401(k) in company stock may expose you to concentration risk. It's generally recommended to diversify your investments to mitigate risk.