When you started your 401(k) at work, you were probably handed a plan document that nobody but a Wall Streeter could understand. You were then expected to make decisions that would determine how much money you’ll have in your later years.
Huh? If it’s all hieroglyphics to you, I want to give some easy guidance to make sure you’re on the right track.
The most common mistake people make is going into what appears to be the “safest choice,” something like a stable value fund, where the plan doc says you’ll never have to worry about losing any money. That’s not the approach you want to take when you’re in your young years.
The younger you are, the more you want to be focused on growth of capital, not preservation of it. The time to switch gears and focus on preservation of capital is when you’re mid-career. At that point, you don’t have a long horizon to let your money re-grow if the stock market takes a nosedive.
For those who are completely perplexed by investment choices, I say the smart option is to go into a target-retirement fund.
With a target-retirement fund, you select the year that’s closest to your expected date of retirement and pop your money in. Then the fund’s manager allocates it for you. No mess, no fuss on your part. When you’re young, they have you heavily in stocks. Then as you age, you get less and less stocks and more bonds.
It’s a classic investment model, but one that lets you take a “set it and forget it” approach to investing.
If you do want to branch out and take more control of your investments, see my investment guide for help.
Editor’s note: This segment originally aired Nov. 2, 2011