Description: The article contains the topic on 401k. The author is going to indicate several tips for the absolute beginners who are teens or the ones that have just graduated from college to know how to invest a 401k. He will guide us to choose different investment options for certain situations.
How’s it going? Today, I’m going to talk about investing for absolute beginners, you could be a teen or graduated from college and you’ve got a job where they offer you a 401k option, most of the time, they go here, you go and then there’s a bunch of investment options and then you pick one of them.
What’s the division between this fund and that fund? You’re left to try and figure it out yourself, there’s actually a lot more going on with the fund, then you’re picking whatever percentage and leaving it alone.
Today I’m going to cover the things they don’t tell you, but it’s very important for you to know the background, the psychology behind it, so you are informed an investor and you know what to do when certain events happen.
The first thing to know is sometimes if you change companies, they might boot you out of the plan and they might cash you out, when that happens withhold taxes from it and they send you a check, that’s very bad.
If you ever let that happen, you essentially have to open up a new IRA account, put money in there including the withholding that you don’t have anymore and also the penalty.
It’s ten thousand dollars in the 401k account and you got a check for six thousand, you have to come out with another four thousand and put it in an IRA, that might be hard for someone starting an invest.
So if you ever change companies and be warned, they’re going to close your account, be certain to roll it over as soon as possible, because if you forget or fail to do it in time, they will catch you out and you’re going to end up having to pay a lot of upfront money in order to avoid any penalties.
These company 401k plans usually have a lot of different funds that you can pick from, generally I have seen anywhere from ten to twenty or thirty funds, it’s usually these target date funds.
Sometimes, they do have low expense ratio ETF funds or the indexes, but this depends on the plan that you have, if you’re beginning to invest and you got a total portfolio of maybe zero to twenty thousand dollars, the expense ratio is not going to be that bad on your total portfolio especially in the beginning, because you don’t have that much to compound yet.
So you shouldn’t be too worried about the expense ratio, but keep note of that whenever you have the chance to get a lower expense ratio, do it if you’re stuck in a plan that has high expense ratios, don’t freak out or anything.
Let it invest if you ever changed up, roll it into an IRA and then at which point, you can buy the low-cost index ones that you like a typical novice thing to do would be to time the market.
I’ve done this myself, I try to buy and sell a fun, you essentially buy one fund within that 401k plan and then as soon as you sell it, you cannot buy back into it for 30 days, so what I did before was that I buy a different fund, because I know several of those funds would move with the market.
So I’m trying to time the market, you’re not supposed to do that, but that’s what I did, I had success with it, I wouldn’t say I beat the market or anything, but it was something I was experimenting with.
So a lot of studies have been done saying you shouldn’t try to time, the market essentially gambling when you try to time, if you have some good insights or maybe you get lucky, then you can outperform the market.
But the thing to know is that it’s hard to outperform the market for a long duration of period, so if you ever tried the time to market for five years, maybe you would get lucky the first two three years, maybe you made twenty percent, which is something I was able to do for a year.
But when I sold out of the market, I didn’t get back in, I didn’t get all the games that that market was also getting, so then I average this out, maybe I even lost a little bit as compared to that.
If you put the money in and keep on investing, if you stay steady and true and keep on investing most likely you would get better returns than most people, the whole idea with this investing is to dollar cost average.
So as you’re working, you’re always investing a little bit in there every single month, I’d say the most important thing of this investing business is not to freak out that the market ever crashes, it’s much harder than you think it is.
If you’ve never experienced a market crash before I’ve seen the 2001 and the 2008 crash where I saw the whole market go down by 50%, you see it unfold before your eyes, you had $10,000 in there, one day, it drops 10%, it goes down from $10,000 to $9,000, that’s $1,000, that’s like how many weeks of pay.
Then the week after drop another thousand and then the week after drop another thousand and then by the time maybe five or six months, you saw your portfolio go from ten thousand dollars to five thousand dollars, this will make most investors very scared.
So why am I telling you this? Because you have to be mentally prepared for your portfolio to go down by a lot and keep on investing, so you do a mental exercise, your portfolio goes down by 50%, what are you going to do? Are you going to be the type that would sell some so that you won’t take any more losses or are you going to keep on going and invest any more?
When you invest some more, it’s going to be at the low cost which is good for your total portfolio, there are a lot of blogs out there saying you should completely put all your cash into low-cost ETF funds that are the indexes of SMP or something.
The deal with this is that it’s fine to do that, if you plan to retire in 30 years with a lot of people saying I’m going to retire, then if your time frame is 10 years, you may not have the time frame to fully invest in a SMP 500 index one, because it’s very volatile and you could get caught in a point where the market dips a lot.
By the time you retire, it hasn’t fully recovered and it hasn’t gotten gains, so most financial advisors would recommend you to get less and less aggressive as you get towards retirement, because if you’re a year or two within retirement, then you don’t want your portfolio to fluctuate by that.
You want that to be a short thing, however, if you are somehow flexible, if you say you are going to retire 10 years or 15 years, I don’t care it doesn’t matter too much, if the market goes down a little bit, I can delay my retirement by 5 years, by 10 years, 5 or 10 more years in delaying your retirement.
I think most people that have a target are not willing if they can help it to extend their retirement by that much more, so if you do plan to retire in 10 years, you have to pick a target date fund, today is 2017, if you plan to retire ten years from now which is 2027, then you need to pick that, it’s fun date of 2027 which would get you fewer gains per year, mainly because it’s a lot more conservative, it’s not fully invested in large cap stocks and things like that.
Those are more volatile, so that’s all for today, I hope this gives you a little bearing around what you should do with a portfolio, it’s not as simple as picking one target date fund, because at some point, you might be very tempted to sell all of it out and go.
I’m going to take the cash and run from the market and not invest any more, don’t forget to give me a like on this video, comment down below, let me know if you already know about all this.
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