Regardless of what is happening in the market at any one time, smart investors understand that how they invest their 401k right now is really important. The results might not show up immediately but they are cumulative. That means how you invest, the process you use and the resulting actions you take, are going to have a huge impact on your financial future. That’s because the process you use today will be repeated over and over and over again. That’s why it’s critical to get this right.
So how should you invest your 401k right now? Start by trying to forget about what’s happening right now. I say that for a couple of reasons. First, nobody really knows what’s happening in the market and/or economy at any particular time. There are simply too many players and too many moving parts to really know with certainty what’s going to happen. For each time you guess right there will be dozens of times you’ll guess wrong. And those guesses are what sinks retirement ships Skipper.
Next, understand that your retirement account has an extremely long life-span. You likely want that retirement money to last as long as you live at the very least. That means it has to be invested with a mindset that goes far past your retirement date. Of course it’s nice to have a huge nest egg the day you retire. But does it have to be 100% guaranteed the day you retire? It doesn’t. And if you stick all your retirement money in guaranteed accounts the day you retire – or a few years before – how much is it going to earn for the decades you spend in retirement? Probably not much.
Think about how long you want your money to last. Think about what you want your money to do for you and for how many years. Forget about your retirement date. It has absolutely nothing to do with your investment strategy.
So how should you invest your 401k?
Well if you plan on living more than 10 years it’s important to consider equity. Of course there are no guarantees but equity growth tends to outperform fixed income over time. Of course you have to balance your need for growth with your need for safety but over time my strong suggestion is to have at least some portion of your 401k invested in equities unless you have mitigating circumstances. But keep in mind that equity can supply you with the retirement income you need by using safe withdrawal techniques. Just because you need retirement income doesn’t mean you have to sink your dough into bonds my friend.
What about when the market is weak?
When the market is weak prices are low. That means you can pick up shares are bargain prices. As painful as it may be, I strongly recommend that stay on the path. Do not suspend your contributions even though it may feel like you are throwing money down the drain. You aren’t. You are buying shares at a discount. You are accumulating more shares. Over time that will be reflected in higher account values. Try to resist the urge to over-ride your intellect.
Neal’s Notes: Do you really know if the market is strong or weak? Why not consider using graphs to help you get an objective bird’s eye view of the investing landscape?
What about when the market is doing great?
When the market is strong it’s still important to be mindful about how you allocate your 401k. It may seem like everything is going up – and that’s wonderful of course. But don’t get so euphoric that you discard your investing discipline. If you allow yourself to get caught up in the prevailing mood when times are good, you’ll be very susceptible to getting caught up in the mood when things turn south. I am not recommending that you necessarily buy and hold. There are alternative strategies. Just be mindful rather than act on your emotions.
Really, when it comes to your 401k, the bottom line is the best way to invest is to forget about how the market is doing at any one time. Instead, work out a strategy that suits your long-term needs and stick to it.
Have you ever shifted your 401k as a result of the market? How did it work out for you?
moneystepper says
Great advice. Get the money into the market come rain or shine.
Its time in the market, not timing the market!
Neal Frankle says
This is a very very good question. I’ll assume that once you retire, you’ll start tapping into your 403(b) and then continue to do so for many many years. That being the case, an argument could be made for keeping that money invested in money market. That way, you’d build up a reserve and when you start making distributions, you could tap into that giving your other funds even more time over which to recover.
Make sense?
xenawp says
and what about those who only plan to work approx.2 more years?? I just increased my 403B contribution but perhaps I should put that money somewhre else even perhaps lowering my contribution from what the original contribution was?? would this money be better somewhere else??