Common 401k Investing Mistakes - How to Avoid Them
You work very hard on your job and make good pay. You dedicate some of this pay for your retirement and can't afford to lose it right? Well here's some good tips on how to avoid some of the most common 401k retirement saving mistakes that could cost you your life savings:
1) Diversify Your Investments
You probably will hear this from every financial expert. If your employer offers one type of mutual funds to invest in, do NOT put all your money into it. Diversify your savings into multiple mutual funds that are yielding different returns. Do not put all your eggs into one basket!
2) Don't Put all your Money into your Employer's Company Stock
Most big corporations trading on the public stock markets will offer their own stocks as part of the 401k investment plans. As in the case of Enron, do NOT put all your money into your employer's stock. Some people thing investing in your company's stock shows a sign of loyalty to your employer. This is not loyalty, this is absurd!
If your employer goes bankruptcy or cash strapped, then you will lose all your money (because you did not diversify - point #1). As a rule of thumb, do NOT put more than 10% of your retirement savings into your company stock.
3) Small Firms can make Money too
If you are the typical investor, you would want to put more of your money into large cap growth corporations listed on the S&P 500. You should partially do this, but remember over the longer term, small firms do better than large corporations in terms of growth. This is because new and innovative ideas take a very long time to come into realization and implementation for big corporations, while they can take days for implementation if it were a small business.
4) Invest Outside of US
There are tons of markets out there in the world doing much better than the US. And with the recent weak US dollar, it just makes sense to look for investments outside of the US. Japan, Dubai, Singapore and many European markets are particularly attractive and have huge stock markets. As a rule of thumb, think of investing 25% - 50% of your retirement savings in international markets.
5) Avoid Hidden Investing Fees
If you invest heavily in mutual funds as part of your 401k investments, make sure you invest in no-load mutual funds. These are mutual funds that do not require a percentage of fees to buy and sell. There are many mutual funds that have high "internal expense" fees. For example, one mutual fund can have 0.5% internal expense fee while the other has 1.4% fee. Go with the mutual fund that has the lower internal expense fee (0.5% fee).