If you are looking to reach financial freedom and retire comfortably, then you need to be able to confidently choose the investments that will generate the best long-term return for your 401(k)
The problem is that most 401(k) plans make it hard to understand what youβre investing in, which can lead to low returns putting your future at risk.
I don't want that to happen to you. Which is why I'm sharing my simple 3 step guide that I use to select the bext investments in my 401(k).
If you have time for the full walkthrough with live examples using my own account you can watch it here:
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If you just want the summary, then let's dive in.
Step 1: Find Your Asset Allocation
"Asset allocation" is a finance phrase that simply means how much of your portfolio is in a certain "asset."
Common examples of assets include Stocks, Bonds, Gold, Real Estate, and Cash.
There is a lot of debate about how to find the "perfect" asset allocation, but I've found there are about three that work for 99% of investors.
Portfolio 1: 100% Stocks
Many investors advocate for putting their whole portfolio into the stock market.
Even Warren Buffet is a proponent of this idea.
Personally, I think it's a little risky...after all, the stock market can go down upwards of 40% in a year.
No matter how detached you think you are from the market, if your portfolio is down 40%, it's going to hurt.
Which is why some investors prefer to use the "100-Minus" Rule.
Portfolio 2: The "100-Minus" Rule
This is a rule of thumb that states you should subtract your age from 100 and allocate that percentage of your portfolio into stocks, while the rest goes into bonds.
For example, I'm 31, and 100 minus 31 is 69(nice), so 69% of my portfolio would go into stocks, and 31% of my portfolio would go into bonds.
This is considered a "dynamic" asset allocation.
Dynamic simply means that this strategy gets adjusted over time, in this case around once per year.
The rationale behind this strategy is that as you age, you have less money in stocks, making your portfolio more stable and less risky.
But there's one more asset allocation that I think gives very similar benefits without having to be adjusted on a regular basis, and that's the 60/40 Portfolio.
Portfolio 3: The 60/40 Portfolio
60/40 refers to a portfolio with 60% of its assets in stocks, and 40% in bonds.
This creates a nice balance between risk and reward, so that when the market goes up, you have enough stocks to benefit, and when it goes down, you have enough bonds to cushion your fall.
What I love about this portfolio is that it consistently generates solid returns and you can pretty much "set it and forget it."
This is my personal favorite, but any of these three will work for the average investor, and there are plenty others you can research as well, but they're typically more complicated and in my experience they won't get you a much better return compared to the three I've laid out here.
Once you've decided on your asset allocation it's time to look into your investment options.
Step 2: Evaluate Your Investments
Everyone's 401k is different in terms of the investment options you have.
In mine for example, there is a limited set of mutual funds to choose from, and some of them have really weird names.
Here's what do to pick the best one using a stock fund as an example, and this applies to other asset classes too, such as bond funds.
First, find your "fund fact sheet."
This is a PDF or piece of paper that outlines all the funds you can invest in, along with basic information like the name, ticker symbol, and asset class.
S&P 500 stock funds typically have "500" or "Total US Market" in their name. For example, mine is called "Fidelity 500 Index Fund," and the ticker symbol is "FXAIX."
(check out the video is you need a visual)
Next, go to good and search your fund's ticker symbol and "morningstar."
This will pull up the fund's profile on Morningstar.com, a free database for mutual funds.
On the profile page, I look for two things: Expense Ratio and Performance vs. the Index.
Expense Ratio is what the fund charges you to manage your money as a % each year.
So a 1% Expense Ratio = $1,000 per year if you have $100,000.
Try to find funds with the lowest Expenses Ratio.
You also want to make sure your fund has good performance compared to its index.
It doesn't need to OUTPERFORM, it just needs to be in line.
The worst funds are both expense AND they don't track their index.
Again, if you need a visual, check out the video I linked in the intro.
Once you've identified these, you can then compare across similar funds to find the one with the best combination of low fees and good performance.
Step 3: Implement Your Portfolio
The final step is to implement your portfolio, and for this step I HIGHLY recommend you check out the video, even if you just skip to Step 3 which is only around a minute or two in length.
The quick summary is that 401k plans often use really confusing terms that can lead many investors to clicking the wrong links and buttons in their account, and I don't want this to happen to you.
Luckily, you're reading this newsletter and watching my videos, so you definitely won't make those simple mistakes. :)
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