Watch out for these common 401(k) mistakes
Younger people should keep in mind that their money is not being accessed for over 20 or even 30 years. Rolling returns for stocks over a 20-year period have consistently been higher than fixed income. Taking advantage of their long time horizon is important.
Conversely, people in their 50s need to be more cautious in their investment allocation. This is to ensure that they can weather any market storms resulting from any drastic short- to medium-term volatility.
Biggest causes of poor performance:
- Emotions (fear or greed)
- Investing in the latest top-performing fund
- Avoiding under-performing areas of the market, assuming recovery will not happen
- Foregoing their investment plan in an attempt to time moves in and out of the market
Timing the tops and bottoms of market cycles is an very difficult investment strategy. Very few people in the world are capable of timing the market consistently. Panicking and selling once a correction has already started and then trying to get back in when the market turns back positive is a dangerous proposition.
The “Set It and Forget It” Approach
The “set it and forget it” approach to investing is all too common among 401(k) contributors. If the stock or bond market rises or falls dramatically, you could end up with a much bigger or smaller percentage of your portfolio in an asset class than you originally intended. This can be dangerous over time especially as you get closer to retirement.
By rebalancing at least every year, you stick to your investment discipline and have the benefit of essentially buying low and selling higher than you otherwise would. You are also doing it in a disciplined manner and not trying to time big market swings.
Generally, an IRA will have more flexibility with access to thousands of investment choices. Usually, within a 401(k) plan, the investment options are limited. Although these choices are sufficient for a properly diversified portfolio, the plan may not have access to the best or lowest cost investment choices.
Simplification and consolidation of retirement and investment accounts. Attempting to monitor any number of former workplace retirement accounts as you switch jobs throughout your career creates needless complexity. Consistently rolling over your plans to a single rollover IRA creates one account to monitor.