401(k) plans are the most popular retirement investment products available today. But, with so many investors using them, these plans see some of the worst investor mistakes. Here are three common mistakes you can avoid:
Micromanaging the company retirement plan. It all started with the dot-com years when you could buy something today, sell it tomorrow, and make three to five percent or more. However, with a 401(k), it's usually better to just leave it alone. Set it and forget it.
In the late '90s, people were buying and selling the funds in their 401(k) at a profit. Some people may have had some luck, but investors rarely make money trying to market time individual stocks, much less mutual funds. Remember, individual holdings trade immediately on the market, while mutual funds buy and sell at the end of the trading day. You may sell mid-day during a market sell-off thinking you have captured the high only to find out that your fund did not trade until the end of the day and you lost money.
[In Pictures: 6 Numbers Every Investor Should Follow.]
Many investors stopped contributing to their 401(k) in 2008 when the market was crashing. Then they began contributing again in late 2009 when the market recovered. The thing to remember is that you should buy low and sell high. If you stop contributing when the market is crashing, you are missing out on bargain prices.
Choosing funds based on performance. Investors often allocate all of their money to one or two funds. Most funds and asset classes make money a large percentage of the time and lose money a small percentage of the time. But, if all of your money is in one fund, when that fund is in its down cycle, all of your money is going down.
[See the top-rated T. Rowe Price funds from U.S. News.]
When choosing your portfolio, include a full mix of all asset classes. The ideal 401(k) portfolio should include growth and value oriented large-, mid- and small-cap stocks; government, corporate, and high-yield bonds (shorter maturities at this time if possible); large-, mid-, and small-cap international stocks, global bonds, emerging market stocks, and emerging market bonds.
It might seem like overkill, but diversification can help reduce risk while helping your portfolio participate in gains when the market rallies. The only issue with this concept is that many 401(k) plans do not offer some of these asset classes. Do your best to include as many as you can in your portfolio. Also, don't be afraid to ask your employer to review the options and even suggest that they add missing asset classes.
Putting too little money into the plan. The best way to invest in your plan is to max out. For most investors, that means adding $16,500 per year. If you are over 50, you can add an additional $5,500 per year. Keep in mind that this could be the most important source of funds to provide you an income in retirement. It is best to build that income stream with adequate savings.
Even if some are not able to max out, many only invest two or three percent in their company plan or worse, they don't invest at all. Many times if employees invest six percent, the company will match $.50 on the dollar. That means that if they simply add six percent of their salary to the plan, the company will give them a gift each year of three percent of their salary. That would be a total of nine percent of your income being invested each year. I never turn down free money and neither should you.
No matter how you feel about your company's plan, remember: don't micromanage it, choose a good portfolio, and put in as much as you can but at least up to what the company will match. It's your retirement, take control of it.
Good luck and happy investing.
Kelly Campbell, CFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.