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What Are the Best 401(k) Investments? It Depends.

January 10th, 2024 | 3 min. read

By Advance Capital Team

person checking 401k investments

When it comes to choosing the best investments for your 401(k), the most accurate answer might not be the most satisfying one: it depends.

That’s because the definition of “best” is highly personal. The optimal choice for your 401(k) investments hinges on a variety of factors, each unique to your financial situation and goals.

At Advance Capital Management, we understand that while 401(k)s are crucial for a comfortable retirement, the information provided is often limited and perplexing. To address this, our ACM 401(k) Builder program offers personalized management of your 401(k) by a financial adviser. We prioritize tailoring each decision to your specific needs while ensuring you’re well-informed about the process.

So, if you’re uncertain about which investments to choose for your 401(k) or are reevaluating past choices, we’re here to help. This article will guide you through essential factors to consider in making 401(k) investment decisions that are right for you.

Understanding Your Employer's Plan Options

The first step in determining the best 401(k) investments for you is to review what’s available in your employer’s plan. Every plan offers a different set of investment options, and it’s crucial to understand them before investing your hard-earned savings.

Here’s what you should focus on:

Types of Funds

Your 401(k) plan will likely include a range of fund types, each with its own characteristics.

Mutual Funds: These are managed funds pooling money from many investors to purchase securities. They offer diversification but come with varying levels of risk and management fees.

Index Funds: These funds aim to mirror the performance of a specific market index, like the S&P 500. They’re known for lower expense ratios and a passive management approach.

Target-Date Funds: These funds automatically adjust their asset mix as you approach your target retirement date. They start off riskier (more stocks) and gradually become more conservative (more bonds).

Asset Classes

Diversification across different asset classes can balance risk and return. The following are the most basic asset classes to know.

Stocks: Shares in companies can offer high growth potential but come with higher risk.

Bonds: These are essentially loans to companies or governments, offering regular interest payments and lower risk compared to stocks.

Money Market Instruments: These are short-term debt securities known for their safety and liquidity but offer lower returns.

The Cost Factor

It’s important to be mindful of the costs associated with your 401(k) investments because these costs directly reduce the returns you get to keep. Lower costs mean more of your investment earnings stay in your account, compounding over time. This can significantly impact the growth of your retirement savings.

Let’s look at some costs that you’ll likely find in your 401(k):

Expense Ratios

What They Are: This is the annual fee expressed as a percentage of your investment in the fund.

Impact on Returns: A lower expense ratio means more of your money is invested, potentially leading to better net returns over time.

Additional Investment Fund Fees

Apart from the expense ratio, investment funds may have other fees associated with them.

Examples: This can include management fees or service fees.

Impact on Returns: These additional fees, while they might seem small, can accumulate over time, reducing the overall growth of your investment.

Learn more about the impact of investment fees by reading the article here.

Stage in Your Career & Financial Journey

Your age and the number of years until retirement also play a role in deciding how to allocate your 401(k) investments.

Early in Your Career: If you’re younger and have a longer time horizon, you can afford to take on more risk. Investing heavily in stocks, known for their higher growth potential over the long term, might be a wise strategy.

Approaching Retirement: If retirement is on the horizon, a more conservative approach is advisable. Shifting towards bonds and other lower-risk investments can help preserve capital.

Diversification: The Key to Mitigating Risk

No matter where you are in your financial journey, diversification is a good strategy. It involves spreading your investments across various asset classes to reduce risk. A well-diversified portfolio can weather market fluctuations more smoothly. What counts as diversified? This guide on diversification explains.

Regular Reviews and Adjustments

Your financial circumstances and goals aren’t static, and neither should be your 401(k) investments. Regularly review your portfolio to ensure it aligns with your current financial situation and future goals. As your circumstances change, don’t hesitate to adjust your investment allocations accordingly.

Over time, some investments may outperform others, causing your portfolio to drift away from its original asset allocation. Rebalancing helps in readjusting your portfolio back to its target allocation. It can also help in systematically buying low and selling high, which can be beneficial for your portfolio’s health and growth.

Bottom Line

The best 401(k) investment strategy is highly personal and depends on your unique financial situation, goals and risk tolerance. By understanding your employer’s plan options, aligning your investments with your personal goals, considering your stage in the financial journey, and maintaining a diversified portfolio, you can make informed decisions that pave the way for financial success.

Investing in your 401(k) is a journey, and you don't have to navigate it alone.

If the idea of professional guidance and comprehensive financial planning appeals to you, consider scheduling a free consultation with us today about our ACM 401(k) Builder program.

This is your opportunity to partner with a skilled financial adviser who can manage your 401(k) and provide broader financial advice, all at an affordable cost.

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.