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Investing 101 for Your 401(k)

By Stuart Robertson

Many people’s first exposure to investing is their employer’s 401(k) plan. But what is investing and what do you need to understand to retire the way you’ve envisioned? Well, let’s cover some basics, offer some quick education resources, and dive into how to think about saving for retirement with your 401(k).

What is Investing?
Investing is putting your money into assets with the goal to receive income or profit. Common asset classes in investing are stocks and bonds, and may include Real Estate Investment Trust (REIT), commodities, etc. For definitions of these types of investments, scroll through our glossary. Know that your 401(k) will typically have a fund that holds one or more of these asset types such as a basket of stocks or bonds.

What Types of Investments Do 401(k) Plans Offer?
401(k) plans will typically offer a curated list of Exchange-Traded Funds (ETFs), or traditionally, mutual funds. A 401(k) plan is designed to provide a diversified investment line-up to help you invest for tomorrow while minimizing the chance for sustained large losses. This is typically why you don’t see the option to purchase individual stocks. An employer is required to review and monitor the investment offering to ensure it’s appropriate and has good funds -- or employers will have this professionally managed if they don’t have investment experts on staff (FYI -- all ShareBuilder 401k plans investment offerings are professionally managed).

How Much Should I Try to Save of My Salary for Retirement?
While the answer varies by person, in general, you need to save 10%-15%* of your income over a 40-year career to live at your standard of living. The general goal is to get to 10x of your salary at retirement age of 67. For more insights, ideas on how to get there, milestones, and more, read our blog on How Much to Save for Retirement.

What Investments Should I Pick in My 401(k)?
If you are new to investing or prefer experts manage your allocation, 401(k) providers like ShareBuilder 401k offer model portfolios. The model portfolios range from stable to aggressive, so you can find the one that best describes you and your goals and select it. If you don't have model portfolios in your 401(k) plan, you may want to consider a target date fund. Target date funds aren't likely as precise in considering your risk tolerance versus a model portfolio, but it can be a good way to get started as you learn more.

Regardless, if you prefer this method, it’s important to understand a few things about how different asset classes like stocks and bonds tend to perform. Historically, stock funds have outperformed all other asset categories common in 401(k) plans. This is no guarantee of future returns for any asset class, but historic data is good to give you some perspective. Here is the performance of common asset categories over the long-term versus the last decade:

Historic Returns By Asset Class

You might think that you should just simply put all your money in stock funds. Maybe if you are 25 years of age that could make sense, but stocks tend to be much more volatile than bonds and treasury bills. There can be years when the stock market is down. Remember the Great Recession?

Most people want to diversify and keep more money in stocks than bonds early in their careers, and then adjust to more bond holdings as they near retirement. However, if the market rollercoaster is too much for you, less in stocks and more in bonds is better. To learn more on this subject, read our blog How Much You Put in Stocks, Bonds, and Cash Is a Big Deal for Your 401(k) Savings.

What If I’m Still Uncomfortable Picking Investments?
There are both tools and investment options in your 401(k) that can make it easy to get started smart. Some plans offer a questionnaire that help you determine what kind of investor you are to help you consider which model portfolio fits you. If you still aren’t comfortable, you may want to consult with a financial planner (CFP designation is preferred).

The most important thing is to get started when it comes to retirement investing and the sooner the better. The power of compounding can really make a difference for you down the road. You may want to run some scenarios with a retirement calculator to see how this might work for you. And finally, congratulate yourself for taking the time to read this as you think and learn more about investing.

  • Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.