Making the right choices for your 401(k)


Do you have a 401(k) at work? Do you know how to make smart choices when you invest in the plan?

Why safe won’t work

Historically with 401(k) plans, many of us have not had our investments allocated properly for our age. We saw that a couple years ago when the market went through a serious meltdown and those who were approaching retirement and were too heavily invested in stock-type choices got burned.

At the other end of the spectrum, I talk to people in their 20s and 30s all the time who are afraid of the stock market and put their money in what appear to be ‘safe’ choices. These are usually stable value funds, which act like a saving account and offer you minimal return in exchange for you never having to worry about losing dough.

If you are in your 20s or 30s and you’re contributing to your 401(k) at work, that’s fantastic. But ‘safe’ choices are not necessarily the best for you. You need your money to outgrow inflation over the next 30 years or so and there’s really only one way to get it done.

In capitalism, it is owners who have wealth flow to them over time. The way you can become an owner in your everyday life is to hold stock-based mutual fund choices inside a 401(k). Sure, there will be meltdowns from time to time. But over time, as capitalism grows at home and overseas, you will end up with more money.

People like to talk about the good old days. But the reality is today we have nicer lives than 50 years ago when everything was quaint and supposedly perfect. We are a wealthier world and society, and that trend will continue. That’s why it’s important the younger you are that you think of the long term when investing.

Charles Schwab is the first big player I’m aware of to offer 401(k) plans that are solely composed of index funds, which is an ultra-cheap way to own little slices and dices of capitalism.

The most common index fund is one called a 500 stock index fund that owns little pieces of the 500 largest companies in the country. There are a ton of other index funds that own tiny slivers of small companies, midsized companies, foreign companies, Third World companies and everything in between.

I’ve long said the best one-stop shops to own all of capitalism is the Fidelity 4-in-1 Index Fund from Schwab’s main competitor.

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