What Should I Consider When Choosing My 401(k) Investments?

I’ve heard many people say they metaphorically throw a dart at a board when deciding which investments to choose for their 401(k) account. Because most people weren’t taught how to select investments that align with their retirement goals, the options they end up with might not be right for them.

Knowing your retirement goals and personal preferences helps you build an investment strategy. Understanding your investment options, selecting your 401(k) investments, and staying disciplined support a comfortable retirement.

Common 401(k) Investment Options

Mutual funds are common investment options for a 401(k). These funds pool investors’ money and spread it across dozens or hundreds of securities.

Common mutual fund options within a 401(k) plan include stock funds that invest in companies of diverse sizes and geographies. Typical options include:

• Large-cap funds: Focus on larger, established US companies

• Mid- and small-cap funds: Hold smaller companies with higher growth potential and more volatility

• International funds: Provide exposure to markets outside the U.S.

• Value funds: Target companies considered undervalued compared to their fundamentals, typically emphasizing stability and dividends and complementing growth-oriented stock funds for a diversified portfolio.

• Growth funds: Usually invest in companies whose earnings are reinvested to grow the business rather than paid as dividends; the funds aim for share price increases over time, resulting in more ups and downs than value funds.

• Bond funds: Invest in fixed-income securities like government or corporate bonds, which typically fluctuate less than stocks and can provide stability to a portfolio

• Target-date funds: Prepackaged portfolios automatically adjust the mix of stocks and bonds as the chosen retirement year approaches, gradually shifting to more conservative holdings.

• Company stock: Direct investment in employee shares ties job security and retirement savings to the same company, which can create concentrated risk.

Diversifying your 401(k) investments helps you capitalize on market fluctuations. Combining the fund types more effectively spreads risk than investing in only one.

Tips to Develop Your 401(k) Investment Strategy

The following factors influence your investment strategy for your 401(k) account:

1. Goals

Determine why you want to create a 401(k) account. Common reasons include current tax benefits, developing a disciplined savings habit, and long-term retirement income.

2. Risk Tolerance

Consider how much market volatility you can handle without withdrawing from your 401(k) account. Your risk-reward balance should align with your goals and support a disciplined savings habit.

3. Time Horizon

Your age affects the timeframe you have to ride through periods when the market drops 50% or more. For instance, you can be more aggressive at 25 because you have plenty of time to recover. However, your risk tolerance should be lower every few years starting at age 50 because you have less time to make up losses.

4. Life Changes

Getting married, having children, and increasing your income can modify your retirement goals, requiring another look at your portfolio. Creating checkpoints helps ensure your investment strategy still aligns with your plans.

What to Consider When Choosing Your 401(k) Investments

Use your goals and risk tolerance to mix stock funds, bond funds, target-date funds, and other investment options in your employer’s 401(k) plan:

• If you are starting your career, you might select a target-date fund because it automatically adjusts over time.

• For more control over your investment returns, you could combine large-cap, mid-cap, small-cap, and international stock funds with bond funds for diversification.

• If you have a high tolerance for risk, you might choose equities.

• As you move closer to retirement, you could shift toward bonds and other conservative investments.

Maximize Your 401(k) Contributions

Contribute enough to your 401(k) account to get the full employer match. Because a company match is part of your compensation package, receiving it provides your complete paycheck.

Saving for retirement in a traditional 401(k) account lets you invest pre-tax money that grows tax-deferred. If you are a high earner, your contributions could put you in a lower tax bracket, saving a significant amount on taxes. Earning compound interest on your savings increases the amount available to live on in later years.

Increasing your 401(k) contributions by 1% annually lets you save more for retirement. Because raises typically outpace this increase, you likely won’t notice a difference in take-home pay, whereas your 401(k) balance will increase.

*This information is for educational purposes only.

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