For many people, 401K is a great way to defer being taxed now and let the retirement money grow faster. This is especially true if your employer also matches some of your contributions. So it would be wise to take care of your nest eggs carefully and not let them drop inadvertently due to your carelessness. Unfortunately it it not an easy job to manage your 401K since the choices of investment are usually very limited for 401K accounts. Even worse, the only investment vehicles within 401K are usually limited to mutual funds. For those who know the investment, maybe over 90% of mutual funds are losing money in the long run. So our hands are significantly tied up in making a wise decision what to invest in our 401K. Having said that, you should still not simply give up and let it unattended. I'm managing my wife's 401K and below I use that as an example regarding what to invest within the limit of her 401K defined by their company. Of course, each 401K is different in terms of fund choices but the principle may be similar.
The first thing is to determine what strategy I want to use. For 401K, I will not actively monitor it as it is not for trading. When I decide what to invest, I will leave it for months or even longer unless the situation significantly changes. So I want to be diversified and follow the big trend as I'm seeing now. Right now, I think the investment world is very risky and we are not out of the woods yet, far from it. While the momentum for a bull market is very strong as everyone is betting the Fed will print more and more money to prop up the stock market, the economic situation may get significantly worse over time and a double dip is not something not possible. If that happens, the stock market may drop astonishingly. So I want my money over 50% in the safe hands. However, I also don't want to miss the momentum of a rallying market totally, especially I think some international exposure may be much less risky than in the US market. Also, I think the big bull of the resources sector including precious metals has a long way to go and I definitely want to be part of that. With this overall strategy decided, the next is to determine what funds to invest. When you choose mutual funds, very importantly you have to look at their long term performance, best for those funds with a 10 year performance track record. For most funds, they may perform very well during a short period of time due to the mercy of the overall market, but their long-term performance is usually very poor. I'd only be interested in those with a very consistent great performance for 10 years. By scanning what is available in my wife's 401K, I decided to put money in the following 3 funds:
(1) PIMCO Total Return A (the best and largest bond fund in the world).
I put most of the money in this fund. In the investment world, Bill Gross is called the Bond King. He is managing an over $200 billion bond fund, which has never lost money in the past 10 years, even in the worse market year of 2008. If you want to be safe with your money, no one else you should go to. Of course, safety is usually associated with low return. But as I said, I don't believe this market yet and I want to be safe with most of my money at the expense of high return. (2) Prudential Jennison Natural Resources A
While the natural resources section could be volatile, I don't want to be out of this great bull market completely. It is possible you may not see a positive return in the short term, I believe you would be happy to be with the trend in the long run.
(3) Fidelity Canada
As I said, I still want to be exposed to the equity market to some extent and I think Canadian market is a much safer bet than the US. The overall Canadian economy is in much better shape with a very sound financial structure and the regulatory environment. The long-term track record of this fund is also super.
I hope the above example would give you some ideas of how to wisely manage your 401K.
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