The Motley Fool: Managing your 401(k) is easier than it looks
Your payroll professional calls a meeting and explains the company’s 401(k) plan. Your eyes glaze over, hearing confusing words such as aggressive growth, bond, gold, emerging growth, international, value and money-market funds. You haven’t a clue what to do, so you do … nothing. You’re not alone. In 2004, some 21 percent of those eligible for 401(k) plans didn’t participate in them. It isn’t as complex as it looks, though.
Here are some tips:
“Begin participating in your company’s plan as soon as possible, contributing as much as you can. It not only builds your nest egg, but also reduces your taxable income.
“Keep emergency money separate. Invest only what you don’t expect to need for at least five years. (Note: There’s a penalty on withdrawals before age 59 1/2.)
“ If your employer matches your contributions to any degree, take full advantage of that — it’s free money. For example, if your employer will tack on $500 to a $1,000 contribution you make, you’ve just earned an instant, risk-free return of 50 percent. That’s hard to beat.
“Over the long run, stocks beat most other investments, by far. Unfortunately, much of 401(k) money is invested in low-yielding bond or money-market funds, where it grows very slowly.
“Look for an S&P 500 index fund in your 401(k) offerings, as it beats the vast majority of mutual funds over the long run and has lower annual fees, to boot. If your 401(k) plan doesn’t include a broad-market index fund, based on the S&P 500 or the even broader Wilshire 5000, urge your payroll professional to have one added.
“Leave your money in the plan for as long as possible. This delays the ultimate tax bite and permits maximum growth. Don’t borrow from your account unless it’s an emergency.
Learn more at www.fool.com/money/401k and www.401k.org. And to improve your financial future even more, try our Rule Your Retirement newsletter service for free ( www.fool.com/shop/newsletters).
Ask the Fool
Q: If I don’t know much about stocks and don’t have much money, how should I start investing? — M.M., Tampa, Fla.
A: Begin by increasing your knowledge until you feel comfortable putting some of your hard-earned dollars to work for you. Don’t jump in blindly.
Books such as “One Up on Wall Street” (Fireside, $15) by Peter Lynch with John Rothchild and “The Wall Street Journal Guide to Understanding Money & Investing” (Fireside, $16) by Kenneth and Virginia Morris can help you understand the world of stocks. Online, click over to www.Fool.com and www.betterinvesting.org to learn the basics and more. When you’re ready to open a brokerage account, visit www.broker.Fool.com for guidance in choosing a good one.
My dumbest investment
I invested in Amgen around 1989, before its first big successful drug was approved. Since then, the stock has increased in value about 50-fold. So how could that be a dumb investment? Because after the drug approval and after the stock roughly doubled, I sold it. If I’d held on, it would now be worth as much as all my other assets put together. — L.B., Hong Kong
The Fool Responds: Many investors suffer from such shortsightedness. Big gains can be made in many companies — as long as you hang on.