Last week, we offered some tips to help you better manage your 401k. You can watch it here. This week we will share some common mistakes we see people make in their 401k plan. And, we will provide some suggestions on how to avoid them.
Video: Mistakes to Avoid in Your 401k
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Last week we offered some tips on how to better manage your 401(k). You can view the entire post by clicking on the button. If you just want to watch the video….
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401k Mistake 1: Performance Chasing
You have a list of funds. Your employer provides you a list. Included with the list are trailing performance stats. We pay attention to the funds with the best results. Who doesn’t want to own the best performers?
Here’s the problem. The best performers in the past won’t always be the best performers in the future. Studies by both Vanguard and Standard and Poors show funds who outperfomed in the past often underperform in the future.
To avoid this, consider funds which track a specific index. They won’t always be the big winners. But you also don’t have to rely on whether a manager can repeat his past successes, either. Funds which track a specific index also tend to have lower costs.
401k Mistake 2: Trying to Time The MarketMajor declines in your account values cause stress. This is the most difficult part of being an investor. People want to try and avoid those downturns. So, they try to guess when to move in and out of stocks. Unfortunately, most people struggle to be successful at timing those major moves. A study by JP Morgan showed the impact of missing the good days on investor returns.
401k Mistake 3: Misusing Target Date Funds
A few years ago, fund companies created target date funds. They were designed to simplify the allocation decision. You choose the fund with the target date closest to the date you wish to retire.
As you get closer to retirement, the fund automatically adjusts the allocation. It will reduce the amount it allocates to stocks, and increase the amounts invested in bonds.