401K Planning

by Catherine Rein
(last updated April 15, 2009)

I remember my first job out of college and how difficult it was trying to get up to speed on the investment options related to 401k planning. Having a plan for what to invest in and in what amounts is vital for long term 401k planning.

401k plans have been hard hit in recent months and it can be scary trying to determine what to do next. The acronym, DABL, will help you remember a strategy for your 401k investments. D stands for Diversification, A for Allocation, B for Buy and Hold and L stands for Long Term perspective.

  • Diversification. Diversification means to hold a wide variety of investments, including stocks, bonds and mutual funds. It also means you should hold investments in a wide range of industries. Every sector has problems from time to time. Diversification is especially true if you are thinking of investing in your company's stock. Investing roughly 10% of your holdings in your company's stock should be enough and will ensure your 401k security in the event the company's stock value declines dramatically.
  • Allocation. Allocation is part of diversification. Asset allocation generally refers to the portion of the investment pie you have in various categories, like stocks, bonds or real estate. The typical rule of the thumb is for persons 50 or younger to have an aggressive combination of 80% equity or growth stocks, while those close to retirement should have a majority of the total investment in a safe class such as U.S. treasury bonds.
  • Another way to think about allocation is to set any money you need in the next year away in cash. After that, any money you need in the next two to five years should be in a safe fixed-income investment, such as CDs or bonds. Any money you don't need in the next five to 10 years you should look at investing in the stock market.

  • Buy and Hold. Unless you have significant time and energy to invest in actively trading your investments, buy and hold is the better strategy for most investors. You should periodically review and adjust your asset allocations to reflect life changes, such as a home purchase or retirement.
  • Long Term Perspective. You should maintain a long-term perspective, typically five to seven years. Even if you are just a few years away from retirement, keep in mind that you are likely to spend 20 years or more in retirement.

If you are feeling the pain of the current market down turn, it can be tempting to turn away from your 401k. Stay the course and keep in mind the benefits of 401k investing, including tax benefits and employer match contributions.

Author Bio

Catherine Rein


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