401k Investment Strategy

Even if you educate yourself and work with a trustworthy and respected financial advisor you can still make plenty of mistakes with your 401k investment portfolio. Here are the top 5 most common mistakes made by 401k investors.

1.Believing that your 401k is Free
Sorry to break it to you but investing and maintaining your 401k is far from free. Everywhere you turn there are fees so make sure you educate yourself to learn the full costs of the 401k plan. There are annual expense fees, front and back load commissions on trades, termination fees and administrative fees just to name a few. While you want to make smart investments and allocations, understand that every trade costs money and those costs need to calculate into your profit. Remember to break even on the trade you first have to earn the commission back, and then you can start thinking about profits.

2.Blindly Following Trends

Just because something is “hot” now is in no way an indication of future earnings. In fact, by the time you hear something is “hot” it is probably already reached its peak and is back on its way down. You should be looking for the next big more, remember, buy low and sell high is the successful strategy of an investment plan. Don’t just listen to others, do your own research and consult your financial advisor.

3.Putting All Your Eggs in One Basket

The most important thing you can do is to ensure that you have a diversified investment portfolio. Mutual funds are great for that as they usually consist of a diverse range of companies. You want to hedge yourself in case of economic downturn (we all should have learned our lesson by now) and make sure that you protect yourself with safe investments like bonds and gold, as well as riskier positions, especially if you are young and have years to go before retirement.

4.Borrowing From Your 401k

Borrowing from your 401k should be a last resort for any emergencies. If you borrow you will be forced to pay back the money with interest and also be charged an early withdrawal penalty that can be hefty. If you leave your company early you could be forced to pay it back right away. It is better to try to get a personal loan or a home equity line of credit before ever tapping your 401k savings.

5.Not Contributing the Full Amount

Your 401k can be the key to a prosperous retirement so why cheat yourself, especially if your employer is willing to match. Why would you ever turn down free money? With compounded interest you stock away plenty of cash when you will need it most. There are numerous 401k calculators online that will help you determine how your contributions will affect the amount of money you bring home each month.

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