In this week’s episode we are talking about the 7 steps you should take when choosing investments inside your 401k.

Show Notes:

  • Step 1: What is your investment plan (i.e. investment policy statement)
    • Includes goals and objectives
    • How you will reach those through asset allocation, risk profile, financial goals, rebalancing method
      • Percent in stocks vs bonds for target
        • Going deeper how much in international vs US, growth vs value, real estate, short- term and intermediate bonds, cash/money market, etc.  
      • Growth, conservative oriented?
      • Short-term and long-term goals want to / need to meet
      • Strategy for rebalancing 
      • Goal of how much to put away.  Dollar amt? Percentage?  
      • Do you receive any matching money
  • Step 2: Look at 401k investment options
    • Look at the expense ratio. Aim for 0.20 or below
    • Look for word index fund
    • Secondly, how do they fit into overall asset allocation
  • Step 3: Put investment options in order
    • From lowest expense ratio. 
  • Step 4: Review investment plan
    • With investment options you selected with low expense ratios and/or word index review how it fits into your investment plan
    • Write down next to each option whether it’s a stock or bond fund.  What is your overall target asset allocation
    • What fund(s) match your investment objective?
    • What fund(s) are missing that you may need to fill with out accounts?  (i.e. spouse accounts of 401k or IRA, your own IRA, taxable account)
  • Step 5: Act
    • Set up the desired amount to come out of every paycheck.  Talk with HR
    • Go at minimum up to the match
    • Put away the goal amount to fund other accounts as desired and needed to.
  • Step 6: Review and adjust
    • Sticking to your rebalancing strategy review accounts and rebalance if needed
    • Review annual notice information by investment company to see if any funds have been added or deleted and/or if expense ratios have changed
  • Step 7: Raise Hell
    • If you don’t like your investment options write a letter / talk with HR.  Get a petition going
    • From your list in step 4 what investment options were missing that you would like?  What fund(s) that you are investing in or would like to are costing to much?  Are they cheaper elsewhere.  
    • Might be that your HR person or boss just doesn’t know better.  Keep in mind that this could benefit them to as they invest in the same 401k as you.

5 big items affecting your investment success

  • #1 most important piece is savings rate
  • #2 is asset allocation
  • #3 is investment selection (diversification)
  • #4 is costs
  • #5 is to stay the course

Call to Action:

  • Identify what you are invested in inside your 401k and what are your options.

Resources: