Because the 401(k) is a powerful retirement investment tool, you need to put it on track early in your career and be sure that it does not derail. Let’s talk about some common mistakes I have seen people make, so you can avoid them.
Mistake No. 1: Not getting your full share of the match, or not knowing how to maximize your plan’s match.
Say your 401(k) has an employer match, but you are not getting a dime. Or, say your 401(k) is set up to match your contribution dollar for dollar up to 6% of compensation, but you are only contributing enough to trigger a 1% match.
If your plan has a match, it goes without saying that your goal should be to get your full share. Usually, there is a certain percentage salary deferral that you need to make to trigger the maximum match from your company. (If you are a highly compensated employee, you will be limited by tax laws that keep your contribution below legal limits.)
For example, if your plan offers a 50% match up to 6% of compensation, in order to get your full match of 50 cents on the dollar, you need to defer 6% of your compensation. If you defer anything less, you are not taking full advantage of the match.
Mistake No. 2: Selecting investments that have little chance of growing your assets.
The successful investor always starts with the end in mind. Of the investment options that are presented in your plan, some will be better suited for retirement when you need income, and some will be better suited before you retire, when you need to grow your retirement assets. To be a successful 401(k) investor, you have to understand the difference. If you want to grow your assets, do not pick the investment options that give you the least chance of accomplishing this result.
In order to be successful with your 401(k), you do not need to have an exhaustive knowledge of the markets, or trading techniques, or even many years of experience. What you do need is a resolve to learn the basics about your plan and the investment options available to you, and the discipline to stick with a program of investing that is appropriate for your circumstances.
Mistake No. 3: Chasing the current top performers.
The same people who invest by reading “hot funds to buy now” articles in a magazine have a bad habit that almost guarantees bad results: switching your holdings to last quarter’s top performers.
Top performance figures should never direct your investment activity. You simply do not buy an investment because it has outperformed other options. You buy the investment only if it fits your objective selection criteria, and you hold it until it is time to make a portfolio change that derives from your portfolio strategy.
Mistake No. 4: Trying to guess the stock market’s direction.
Making investment changes in anticipation of up or down market moves is not a good strategy. You’ll be right some of the time; you’ll be wrong some of the time. It’s better to learn about how markets move and to design a strategy that takes advantage of market movements until there is a reason to reallocate your portfolio.
We will talk more about other mistakes. In the meantime, send me some of those you have come across.