Choosing Mutual Funds for your 401k

Choosing mutual funds for your 401(k)

Choosing funds for your retirement plan can be one of the most important steps you take to actively plan for your golden years. Normally, your employer will have a set amount of funds available within the plan, and information will be made available by the firm that manages the program. There are a few very important factors to consider before making your choices, for example:

1. The most important is to determine your risk tolerance and investment goals. This will depend on your age, position, how much you can afford to invest, how you feel about domestic and foreign investments, etc. For example, a younger person, who makes $40,000.00 per year with few expenses might invest in riskier funds or foreign investments, or lean more heavily toward small cap stocks. A 40 year old individual with children, and many living expenses, considering college for their children, and with retirement a thought in the next 20 or so years, may invest more in Blue Chips, bonds, or mutual funds with a capital growth focus.
2. Look at the fund prospectus’ that come with your plan documentation. Some plans have pre-made portfolio strategies that include certain funds. Be sure that you are choosing the best funds or strategy for your risk profile. Some funds will have similar focuses and even carry the same underlying stocks, but have higher 12(b)1 fees. 12(b)1 fees, are the annual operating expenses of a fund that are charged to the shareholders.
3. Diversify! Don’t put everything in one fund. Some funds will perform better in certain market conditions than others will. When stocks go up, bonds go down, when real estate is doing well, so do mortgage backed securities, when tech stocks are down, commodities might be up. Cover your bases. Also, many funds carry the same underlying stocks. Don’t weigh too heavily on funds with the same securities, because one bad stroke for that company could have a serious impact on your nest egg.
4. Allocate your assets. Many plans allow you to move funds within your portfolio a set amount of times without penalty. Do so. At least once a year, or every six months, review your investment performance and even the playing field. Have a set percentage of your portfolio that you want each fund to comprise, if you gain in some funds, sell the gains and redistribute to the ones that lagged a little, until your percentages are restored.
5. Put some in your company stock, but don’t overdo it. This should be a smaller percentage, though you can put more in if you feel risky. This way you can share in how your company is doing, without exposing yourself to too much risk.
6. Lastly, always, always do your homework on each company you decide to invest in. Whenever you invest in a company for a plan of this type, you are essentially buying a product for your retirement. Make sure that it’s a quality product.