Your 401(k) plan is an excellent tool for securing your long-term financial future. But it is only a tool, and the benefit you derive from it depends on how -- and how well -- you use it.
The article linked below under "Essential reading" gives an overview of how to use this tool to the best advantage.
It comes down to this: In the long term, two variables together will make almost all the difference between whether your retirement plan is successful or not.
The first of these variables is very obvious: the amount of money that goes into the plan from you and (if matching funds are available) your employer. No matter how brilliantly you do everything else, your plan won't be much help unless it has sufficient assets in it.
The second variable is less obvious but no less important: what investments you choose in your retirement plan. More than 95 percent of the long-term return you obtain from your investments depends on the kind of investments you make. This is not the choice between one mutual fund and another or one stock and another. It is the choice between the kind of funds you choose. Examples are U.S. funds vs. international funds, stock funds vs. bond funds, etc.
These very important distinctions are called asset classes, and they are the heart of the brief discussion that follows on this page, including the box diagrams.
You can learn more about why asset classes are so important by studying the three articles with links under "Further reading" below. They will also help you understand why we make the recommendations you will find on this site.
Essential reading:
Successful 401(k) investing in 12 easy steps
What does the ideal portfolio look like?
The check marks in the style boxes below indicate the asset classes that work best together in a portfolio optimized to capture the highest returns with the least volatility and risk. Your plan may offer other kinds of funds, but you only need the asset classes shown below to get the best results with the highest efficiency.
The Best Combination of Asset Classes:
A slight bias towards value tends to increase returns and reduce volatility.
As you can see, the ideal combination of asset classes includes:
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U.S. Large Blend (Growth with a bias toward value).
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U.S. Large Value
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U.S. Small Blend
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U.S. Small Value
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International Large Blend
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International Large Value
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International Small Blend
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International Small Value
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Emerging Markets (not shown in style box).
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Bond fund choices (not shown in style box), preferably short-term bonds, medium-term bonds and a stable value fund.
Further Reading
In our experience, the most successful investors are those who understand the basis for our recommendations because they're most likely to implement them and stay the course. The following articles provide that understanding. They illustrate and explain how to construct your retirement portfolio to achieve the highest possible returns commensurate with your own risk tolerance.
The Ultimate Buy-and-Hold Strategy
The Perfect Portfolio
Fine Tuning Your Asset Allocation
Striving to make the most of your retirement plan can reward you greatly in the future. What appear now to be small differences may compound over time to be very significant.
DISCLAIMER:
This information is provided by Merriman Berkman Next, Inc., a registered investment advisor, and is believed to be from reliable sources, but no guarantee is made as to accuracy or completeness. The investment securities and strategies discussed are not suitable for all investors. Recommendations are of a general nature, not based on knowledge of any individual's specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services. Unless otherwise noted, all reported or projected results (1) assume reinvestment of interest and dividends; (2) are net of any applicable management fees and transaction costs; and (3) do not reflect any effect of taxes. Past returns, whether actual or hypothetical, are not indicative of future results, which will be different from those of the past.
