Author: Minich MacGregor Wealth Management

If you’re like most people, your 401K is one of, if not the, most important keys to your future financial security. Managed properly, your 401K can have a significant impact on how comfortably you retire and what dreams you can — and can’t — see through to reality. But like most people, you probably don’t have much of a clue as to what to what the dos and don’ts of a “properly managed” 401K means. Let’s break it down.

Starting with the Dos:

1. Do take advantage of 401K whenever/wherever it’s offered: An employer-sponsored 401K is one of the best ways to build a substantial retirement fund. No matter how close or far you are from retirement, a 401K is a solid strategy. You’ll never look back and say, “Gee, I probably shouldn’t have saved so much.”

2. Do take advantage of the full company match: Many companies match their employees’ 401K contributions up to a certain amount. While not exactly “free” money as you do work for the privilege of participation, employer contributions compound right along with your own, growing your nest egg at a much faster rate.

And now for a few cautionary Don’ts:

1. Don’t keep too much money in the stable fund: Often called fixed or guaranteed funds, these funds sacrifice growth potential for stability. The rate of return on these funds is usually in the low single-digits and does not fluctuate with the stock or bond markets. If you are looking to outpace inflation or the potential for higher returns, don’t over-invest in stable funds.

2. Don’t over-invest in volatile securities without some stable back up: Volatile funds are not for the novice investor or feint of heart. While they offer a thrilling upside they also come with a potentially devastating downside. If your risk tolerance can’t stand a bit of thrill ride, make sure you build some protection into your investment strategy. A base of stable funds will provide you with some security and ensure that a portion of your contribution is consistently protected and secure.

3. Don’t ignore your 401K: When it comes to your 401K, nothing could be further from the truth than the adage “Ignorance is bliss”. While easy and tempting, ignoring your 401K could set up for a future that falls well short of bliss. Take time to understand your investment options, follow trends in the market, and respond when appropriate to keep your 401K on track with your goals.

Don’t know where to start? Talk with friends or family who understand investing and seek advice. Or, turn to a book from a reputable author or seek the advice of a professional. How you go about it doesn’t matter. The fact that you do it does.

’Tis the season for New Year’s resolutions. In addition to the usual “exercise more and eat healthier,” I’d like to suggest adding a new resolution to your list: commit to taking control of your work-sponsored retirement account. And I’d like to suggest sticking to it.

Here’s why:

In recent years, most employers have either decreased or eliminated traditional pension plans in order to cut costs. And while now-common 401(k), 403(b) or 457 plans are nice, they shift the burden of responsibility of saving retirement squarely onto your shoulders. It’s up to you to make sure that your plan is structured to help you achieve your goals and it’s up to you to make the necessary changes to keep the plan on track. While this new reality of retirement planning requires more work on your part, it also comes with the added bonus of more control.

It’s exercising that control that you should commit to exercising in the year ahead. Here’s how:

• Commit to spending more time managing the money already in your plan. How well you manage your plan will affect how well you live in retirement. It pays to learn what fund options you have within your plan and how they match up with your risk tolerance. Talk to your plan sponsor or a retirement account consultant about the advantages of each fund and how they work in different market conditions. Make adjustments to ensure your plan is working for you and not just executing the defaults set up by the administrator.
• Commit to staying on top of your asset. Once a month, take five minutes to track how your funds are performing versus other options within the account. Keep an eye on funds that aren’t performing well and look for options that might better serve you. Make changes as necessary to keep on track.
• Commit to being proactive. Beyond monitoring fund performance, there are other ways to effectively manage your account. For example, ask your company’s plan administrator what they are doing to reduce fees inside the account. Reduced fees actually increase your rate of return so it’s worth asking.

Ask about self-directed account options that may give you access to a broader array of diversified investment options and not just the plan’s default list.

And, yes, dropping a few pounds is always nice and may even earn you a few compliments this year. Taking control of your retirement fund will benefit you not just this year but for years to come. Stay committed, stay in control and enjoy all the years ahead.

Investing is an emotional subject for most people. When things are going well we become confident or even euphoric about our investments. When things start going south, as most investments do at some point, we tend to get nervous — maybe a little desperate. In time, if things go really south, we start to feel defeated. The emotional rollercoaster can be mentally draining and, unchecked, can actually cause an investor to make ill-advised or even irrational decisions.

So how do you get off that emotional roller coaster and start making better investment decisions?

First, forgive yourself a little bit. All humans have a natural bias against taking risk. This aversion becomes particularly obvious when it comes to finances. In fact, even if the odds are in their favor, most people will not take the chance to make money if there is a possibility of loss. We’re that inherently cautious.

Second, get over it. Learn to view risk as something needed and not something to be feared. The simple truth is if there is no risk in an investment there is no opportunity for risk premium paid (a higher rate of return).

Third — and this is what I think is most important — learn to take a non-emotional, disciplined approach to your investments. This means developing a solid investment plan that establishes specific metrics for both buying and selling and, here’s the hard part, stick to it. Don’t allow your emotions, hunches or the advice of well-intentioned neighbors, in-laws, etc. cause you to deviate from your plan.

Similarly, avoid getting emotionally attached to an investment. If it doesn’t meet your established criteria, admit it, get out and move on. There are other things in life worth getting attached to but a bad investment simply isn’t one of them.

Granted, practicing a strict sell discipline may not seem as sexy or thrilling as following your gut, but doing so will allow you to avoid large loss on the downside and lock in profit on the upside. It’s an approach that will ultimately lead to far happier emotions about your investments.