When you start thinking to invest money in your 401(k) account, at first, it seems very easy, but in fact, it is a little bit harder to invest the money appropriately. It is perfectly OK when you are not able to understand what to do with the money.
In this article, we will see the smart and foolproof ways to allocate your 401k money from your account, and the last of the way given in this article will work if other options are not available, so let's discuss the way to allocate the money as below:
Allocate Money In Target Date Funds
It is always advisable to allocate the amount in your 401(k) money in 'Target Date Funds,' the target date means your targeted retirement date. You will get to know about these funds, when you see the name of these funds in the calendar year, such a T.
So, when you allocate the money in these target-date funds, they make your long-term investment very easy. You can decide the approximate date for your retirement, and then you can easily pick up the funds which are close to your retirement date.
Let's say for example if you have planned to get retirement at about 25 years from today then you will need to select the funds which will get mature at about 25 years from now, or close to your retirement date and you can pick the target fund with the appropriate name.
So, if you have opted to invest in these target date fund then it will spread your money from 401(k) plan to various asset classes like - large company stocks, small company stocks, bonds, emerging market stocks, real estate stocks, etc. The target date fund automatically chooses how much of the which asset class should be own.
When you are nearing retirement date, these target date fund progressively becomes more conservative, and start owning less stock and fewer bonds. The main motive behind this is that to reduce the risk; you are taking as you are nearing your retirement date and where you would be more likely to use your money for the retirement.
Allocate Your Money In Balanced Funds
If you have opted for the balanced fund allocation of your 401(k) money, then it will allocate balanced fund across both stocks and bonds. This allocation is most of the time in the proportion of 60% for stocks and 40% percent for the bonds.
The times when the stock market is rising at a rapid pace that does not mean that your money will also be rising at that pace, as you have not allocated 100% of your fun in the stocks. And the same is true in the case when the stock market is getting down your fund will also not get down as per the market falling rate.
In case you are not certain about your retirement date, and at the same time, you want to have an approach which is not too aggressive and also not too conservative in that case you can opt for the balanced funds. You will know these funds by having 'balanced' in their name, and it will balance your investments in all ups and downs of the market.
Allocate The 401(k) Money In Model Portfolios
Many 401(k) providers offer model portfolios; these model portfolios are based on mathematically constructed 'asset allocation approach.' The model portfolios are having names like - Level I, II, III which is names given to assigning conservative, moderate & moderately aggressive approach.
Many financial advisors and skilled investment experts are used to crafting these portfolios so that each model portfolio is having the right mix of investments as per the stated level of risks in these portfolios.
Most of the investors use to put their money in these types of portfolios as per their need and requirement, rather than picking up the individual funds investing 401(k) money in these models are suitable for these investors.
Most of the people still not very confident about choosing these model portfolios and when they made up their mind they still find it difficult to pick in which model it should be invested, in that case, you can opt for the 'investing expert advice' but you need to give him some fee for his services. Investing your 401(k) money in these portfolios is always a more balanced and disciplined approach to investing than investing in any individual funds or stocks.
You Can Opt To Spread Your 401(k) Money Across All Available Investment Options
If you opted to invest your 401(k) money, then most of the plan offers some versions of choices which are described above, and if they fail to offer such option, then you can also allocate your 401(k) money and spread it out equally in all available investment options. And when you have this investment method, you are following most balanced and smart approach to allocating your 401(k) money.
To understand it better if your 401(k) is offering you about ten options to invest in the money then you should allocate about ten percent of money equally in all the options offered to you.
You can also pick one fund from each category, such as you can pick one fund from large cap, one fund from the small cap, one from bonds, one from international, and one that is money market or stable value fund.
If you follow like this then, in this case, you would be allocating about 20% of your money, or fifth part of your 401(k) money in each type of fund.
when you opt to use this method, you should always keep in mind that this method is not always fooling proof, so it is always advisable to consult financial expert or take an advice from investment professional who will guide you about all the pros and cons of this investment method and can also help you to choose the funds and stocks, rather than you just haphazardly choosing the stock investment and may resulting losing the money.