In our previous blog post we covered the first three tips you need to keep in mind when investing your 401k (for those of you that are dead-set on doing your 401k by yourself). In case you missed it, here they are: favor index funds, select the right stock to bond ratio, and diversify. And as promised, here are the final three tips:
4. Rebalance your 401k: In a nutshell, this wonderful tactic keeps your portfolio invested near the original percentages that you selected above in Step #3. Some folks do this manually, some custodians provide you with tools to help you set this up on a regular basis, and some folks hire professionals (like blooom) to do it for them. The beauty of rebalancing is that it trims from your funds that have done well and adds money to funds that haven’t. This may seem counter-intuitive but if you think about it for awhile is starts to make sense. Buy low, sell high. Buy low, sell high. Buy low, sell high…
5. LEAVE IT THE HECK ALONE: There have been studies that have shown that the more times someone looks at their 401k balance the worse their performance is. Wanna know why? It is because human nature takes over the more frequently you peak in at your 401k value. Human nature (more specifically, emotion) will start to take over if you are tracking your value closely – especially in times when the value is declining. You need to know that drops in your 401k are inevitable. It’s not a question of IF, but WHEN and how many times. Your 401k will drop in value and I am here to tell you that is OK. If you are constantly checking the value of your 401k during these times you are increasing the odds that your emotions (fear) will take over and cause you to do something stupid like selling out of your investments and/or stopping your 401k contributions altogether – the biggest sin of them all.
6. Save as much as humanly possible: Aside from Step #2, this will have biggest impact on your ability to retire on your own terms some day down the road. For 2015, you can contribute up to $18,000 annually if you are under age 50 and $24,000 if you are 50 and above. It’s not easy to go from saving $100/month to saving $2,000, so we suggest baby-steps. For instance, every three months, log into your account and raise your contribution by 1%. Or next time you get a bonus, increase your 401k savings. Or the next time you get a raise (say 3%), pretend as if you didn’t get one and raise your 401k contributions by 3%. Whatever you do, just have a plan for increasing your savings. If you find yourself saying, “one of these days I’ll increase my 401k contributions” and you don’t have a plan to actually do it, you will wake up in 20 years with far less in your 401k than you’ll need.