Things You'll Need:
- 401(k) details
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Step 1
The first step in deciding how to allocate your 401(k) money, before you even look at the specific investment options in your plan, should be to form some form of investment statement. Think of it as a contract with yourself. The intent is to formulate a rational plan that can be referred to in the future to keep you from making emotional decisions on the fly.
The statement should set the amount you wish to contribute (as a percentage of your salary), your preferred asset allocation (amount of stocks/bonds/cash) and your rebalancing plans. -
Step 2
Next you can examine the funds available in your plan. You will have to chose between these funds to portion your account to the desired allocation.
When looking at the funds, it is important to look at the expense ratio (the lower the better) and the style of the fund, e.g., large American stocks, bonds, small international companies or whatever. Probably least significant is the past performance numbers because at best they tell little about future performance.
So pick a cheap (by expense ratio) fund for each of your desired asset classes and use these as the building blocks of your portfolio. -
Step 3
Next, set up with your payroll department to have the appropriate amount withheld from each paycheck. Set up to have the money put into the correct funds in the correct percentages as determined in step 2.
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Step 4
Everything should be on auto-pilot now. Occasionally check up on your account to determine if you need to rebalance your account. Rebalancing restores the risk profile of your portfolio to its original state. For example if stocks do really well, your 80/20 split between stocks and bonds might have shifted to 90/10 as stocks gained value much faster than bonds. Selling some stocks to buy bonds takes some gains off the table and restores your original balance.
