Building your 401(k) portfolio
This guide covers the essential things you need to know about building your 401(k) portfolio and explains the steps you should take to manage the assets in your account.
The guide also offers practical measures for dealing with company stock, diversifying your holdings, and evaluating how well your investments are doing.
investing in a 401(k)
it’s smart to take full advantage of your employer’s retirement savings plan.
The best reason for participating in a 401(k) plan is that it can help put you on the road to long-term financial security. Reaching that goal is increasingly your responsibility—though your employer and the federal government help by making a tax-advantaged savings plan available through your job.
Unless your employer enrolls you automatically, you must decide to participate and authorize your employer to withhold a certain percentage of your pay as your contribution. You assign those contributions to investments you select from among those offered in the plan. Together those choices make up your investment portfolio.
The government sets an annual dollar limit on the amount you can contribute, and there’s a catch-up contribution for anyone 50 or older. Your employer may also cap your contribution at a percentage of pay.
Automatic Enrollment
With automatic enrollment, your employer chooses the rate at which you contribute and the investment into which your contributions go. You have the right to withdraw from the plan if you wish and to change the rate at which you contribute or how your money is invested.
Asset allocation
You can slice your 401(k) portfolio to suit your taste.
Asset allocation is an investment strategy for spreading your money across asset classes or the mutual funds that invest in them. Market history shows that when one class of investments is performing poorly, others are often doing better. So by investing in a number of different classes, you may limit your risk and improve your chances of a higher long-term return.
Asset allocation is a three-step process.
You sketch out the mix of asset classes you think is right for your portfolio.
You assign a percentage of the portfolio’s total value to each class.
You buy investments to fill in the percentages you’ve selected for each asset class.
For example, if you allocate 60% of your contribution to stock funds, and you put $400 from each paycheck into your 401(k), then $240 of each contribution goes into the stock funds ($400 X 60% = $240).
Keeping Track
You can track 401(k) asset allocation. Your account statement reports the percentage of your total contribution that goes into each fund. And you can estimate whether the actual value of the different asset classes is in line with the allocation you’ve chosen by dividing the current value of each asset class by the total value of your account.