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

MORE FROM CATHERINE

What is a Mortgage Broker?

A Mortgage Broker sells mortgage loans on behalf of businesses or individuals. They work as the middleman between the ...

Discover More

What is a Healthy Body Image?

A healthy body image is key to avoiding eating disorders and keeping physically active. A negative body image is related to ...

Discover More

Different Kinds of IRAs

There are eleven different kinds of Individual Retirement Accounts (IRAs). They include IRAs for individuals and groups, ...

Discover More
More Money Tips

What are IRS Mileage Allowances?

The IRS allows deductions for car mileage for business travel, medical care and for charitable purposes. You can deduct your ...

Discover More

Understanding the Intangibles of a Salary

When many people look at a salary, they only look at the money that they receive. In truth, there are other things that can ...

Discover More

Unclaimed Money

Many people don't realize that they could have money sitting out there that they don't know about. With just a little bit of ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 3 + 4?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)


Videos

Subscribe to the Tips.Net channel:

Visit the Tips.Net channel on YouTube