The 5 Most Common 401k Mistakes
We’ve analyzed thousands of 401ks and below are the common pitfalls that are holding people’s accounts back from bloooming.
Top 5 401k Mistakes
1) Too Conservative a.k.a too many bonds
The old rule of thumb was that if you subtract your age from 100, then that should be the percentage of stocks in your portfolio. But with Americans living longer, and evidence of higher long-term returns from stocks vs. bonds, this framework is a bit outdated. Instead, raise that number to 110, or even 120.
2) Not Rebalancing
Rebalancing is basically double-checking to make sure your money has the right amount in the right place. But beyond that, it’s also a way of making sure that your investments stay in line with your long-term goals. Most people think they can do this on their own, but it can take a fair amount of time and consistency, especially if you don’t know which funds to pick.
Unsurprisingly, most Americans don’t know much about hidden investment fees. According to inc.com, 92% of Americans don’t know what they’re paying in fees. And they cost you. Blooom projects its median client, over the course of 27 years, may save themselves $24,257 by minimizing investment fees.* Why can such a small number have such a big cost? Compound interest.
4) Too Aggressive
We know, we know. You literally just read not to play it too safe. But here’s why you shouldn’t be too reckless with your investments. Say you’re less than five years away from retirement. We recommend that around 40% of your 401k get invested in bonds, with the other 60% in stocks.
5) Investing in Cash
If you want to invest and make your money work for you, then you have to accept some risk to get a return over the long haul. Merely saving up cash may not get you there. Now, if you're an investor with only a few short years until retirement, holding part of your portfolio in cash may be a good way to meet short-term expenses. But, if you have many years left before you'll need that money, too much cash could be a detriment long term.