How should I invest my 401k?

Posted by rpicon on Jun 17, 2010 in Investor Education | Comments Off

The 401k is an excellent company benefit offered by many employers. But many employees don’t participate to the full extent that they could be doing, and many people have no idea where to invest their funds. Eligible participants of a 401k plan receive an immediate tax deduction for their contributions and the investments grow tax deferred. In 2010 the maximum annual employee contribution is $16,500 (plus $5,500 in catch-up contributions for participants over 50 years old). In addition, many employers provide “basic” and “matching” contributions on top of this amount, provided that the employee stay a certain number of  years before they can claim this “free money.”

One of the best advantages of a 401k is the ability to “dollar-cost-average,”a method of accumulating assets by investing a fixed amount of dollars in securities at set intervals. This systematic approach allows the 401k participant to accumulate a greater number of shares when the market dips and fewer shares when the market is high. Dollar cost averaging into volatile asset classes (i.e. stocks) is one of the best ways to accumulate long-term wealth. In fact, we advise our clients who have time horizons greater than five years to place 100% of their NEW 401k contributions into stocks (large/small/international) and to diversify their EXISTING balance, which may include bonds and cash, in accordance with their risk profile and time horizon. Below is an example of why dollar cost averaging is so powerful. Thanks to dollar cost averaging, you don’t have to worry whether the market is up or down. Dollar cost averaging is certain to produce the lowest average cost, which puts you in a great position to enjoy profits.

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