The decisions involve looking at a number of factors:
You will have to choose from the options offered by the plan. These vary from too few, IMHO, to so many, that it creates choice problems. If it's too awful, you're better off with an IRA. We talk about this elsewhere on this site.
Your age when you start.
Your tolerance for risk. This is a scary word for a lot of people, but we intend to try to demystify it a little.
The goal(s) you set for yourself, such as how much you would like to have in this plan in total after x number of years.
How the plan coordinates with any other investments you have, like IRAs, or any taxable investments you may have.
Your age when you start is a big variable. It's our opinion that anyone who has more than ten years to work with is a long-term investor. Notice we said INVESTOR. If you are a day trader and/or SOES "bandit" you're at the wrong site. If you don't know what we are talking about, thank your lucky stars!! A long-term investor shoud be invested mainly in stocks or stock mutual funds. BECAUSE, historically, going back even before the 'lil incident in 1929, stocks have an average annual return of nearly 11%. No other security investment comes close to this. We need this sort of return to beat economic price inflation, one of the investment RISKS we spoke of before. Also, ten years or more gives us the opportunity to ride out the INEVITABLE ups and downs of the markets, and even to benefit from them.
Your decisions about what to invest in should also include addressing the concept of diversification. That does not mean buying, say the S&P 500 index fund sold by every fund family who has one. Our definition is that your investment selections include stocks and mutual funds who invest in different types of investments. Here's a possible example, again it all must be done within the selections offered by your plan:
A portion in a Standard & Poor's 500 Index fund. This gives you the chance to participate in the growth of America's 500 largest companies. Largest in what's called market capitalization, i.e. total number of shares outstanding times the market value of one share. Companies like: Intel, Sears, Exxon, General Electric, Wal-Mart, McDonald's, Coca-Cola, many other names we all know.
Another slice in an aggressive growth small-cap (see market capitalization definition above - we call any company under $1 Billion a small cap) stock fund. We own shares in a such a fund in a taxable account.
A piece should be in global or international stock funds. The USA is not the only place with stock markets or good investments. This will give you exposure to overseas market growth and can be beneficial when USA and foreign markets diverge in their up or down movement, thereby reducing the overall RISK (There's that word again) of your portfolio.
You can further reduce the overall risk by having a portion of your money in a "value" fund or selection of stocks. Value simply means that the fund chooses stocks that, while they may have lots of promise for the future, are TEMPORARILY downtrodden in the market for any number of reasons, but whose management is in the process of effecting a turnaround. We own a large-cap value fund as our IRA to cover this base, as well as a number of individual stocks.
Shares of stock in your employer? Nothing wrong with that. Some plans require that the employer match be invested in company stock. You just have to be sure that owning it does not concentrate too much of your portfolio there. Do you want your job AND your financial future tied up in one company? Think Color Tile or ENRON - These people lost everything because their companies failed and had invested much company stock in their plans.
Bond funds and other fixed income investments make sense if you want to be somewhat more conservative than we recommend for a long-term investment scenario. They do help stabilize portfolios against volatility (another word for risk, actually) and can be beneficial in that all this income thrown off while in the plan will not be taxed until you start taking the money out of the plan.
Precious metals? Most plans don't even offer these, even as mutual funds. We don't really see a place for them in this portion of your portfolio. Maybe somewhere else, but in any case the whole area is beyond the scope of this website.
Here's some additional points to think about:
Some plans allow you to borrow money out of the plans. Please don't do it. You mess up the returns you could have made leaving the money in there. You run the RISK of penalty taxes if something goes wrong and you can't pay back the money and it becomes an early distribution problem.
Vested and unvested. No, it's not about three-piece suits, although you see a lot of them in bad cartoons about Wall Street.
Vesting refers to the "ownership" of the money in your plan. Of course, ALL the money you put in and ALL the earnings attributed to that money is always "fully vested". You can have it ALL back when you leave the company, subject to all the tax problems involved. The match your employer puts in and the earnings on that is not ALL yours to have until you are "vested", i.e. you have met the requirements for becoming vested. This usually involves how long you have been in the plan and what the rules are, subject to certain minimum requirements specified by federal rules. For example, the plan I was in before I RETIRED (at age 58...) said:
You can join one year after you come to work.
You get 50% match of the first 6% you put in.
You become "vested" in 20% of the employer's match after one year in the plan, 40% after two years, etc. until after 5 years ALL the money in the plan is mine to take when I leave.
If you leave your company, you can usually leave the money in the plan, or roll it directly over into an IRA, and sometimes roll it into a new employer's plan. Please try to avoid getting any of this money paid directly to you. Again, you run the risk of penalty taxes if this is not handled properly.
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