If you’re looking at the investment options available in your 401(k) and are overwhelmed by your range of choices, consider yourself lucky. Many 401(k) plans offer only ver😼y limited investment options, and some encourage participants to invest heavily in your own company’s stock. 

You might not feel lucky, of course, as you scroll down the endless list of funds available to you. Luckily, there are a few ways that you can narrow down the options. Primarily, this process involves carefully considering your risk tolerance, age, and how to minimize the fees that you pay. After taking out investments that aren’t suitable for your 澳洲幸运5官方开奖结果体彩网:portfolio, you should be left with a manageable list.

How to Choose Investments for Your 401(k)

The most common investment options offered for 401(k) plans are 澳洲幸运5官方开奖结果体彩网:mutual funds, although some plans are starting to offer 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs).

Both options can provide a wide range of opportunities that go from conservative to aggressive. Conservative funds are defined by their low risk (and thus low reward), while aggressive funds are defined by high risk (and thus high reward). Funds may also be described as balanced, value, or moderate.

Investors don't have to restrict their choices to just one fund. They can instead spread their money over several funds, although this 澳洲幸运5官方开奖结果体彩网:asset allocation can get complicated. Four main factors should be considered in order to build a solid, well-performing portfolio: risk tolerance, the investor's age, fees, and diversification. 

Risk Tolerance

When choosing investments for your 401(k), your first and most important decision is how much risk you are comfortable with. This consideration is highly personal and is known as your 澳洲幸运5官方开奖结果体彩网:risk tolerance. Only you are qualified to say whether you like the idea of 澳洲幸运5官方开奖结果体彩网:taking a flier or prefer to play it safe. 

Essentially, you want to choose the riskiest investments that you are comfortable with, because these will offer the best opportunities for growth. If you don’t want to take a big risk with your retirement savings—an understandable feeling—then ignore any funds that are described as aggressive, growth, or specialized.

Age

Another key factor is your age (or how many years you are away from retirement), which affects your risk tolerance. As a rule of thumb, a younger investor can carry more risk: in the worst scenario, they have the time to recoup losses since retirement is not imminent. As investors get nearer to retirement, they should gradually move holdings from risky funds and move them to 澳洲幸运5官方开奖结果体彩网:safe havens.

How can you calculate how much risk you should take depending on your age? The most common guidance says that the percentage of your money invested in stocks should equal 100 minus your age, although the figure can be 110 or even 120 since average 澳洲幸运5官方开奖结果体彩网:life expectancy has increased. Using 120 as the basis, a 30-year-old investor should invest 90% of their portfolio in stocks. A 70-year-old investor, however, should invest only 50%.

This advice can further narrow down your investment options. If you are young, the standard approach would be to ignore the more conservative investments offered through your 401(k), and vice versa.

Fees

The two♚ factors that we’ve considered so far relate to risk, which is an inherently personal consideration. The expense ratio of an investment, in contrast, is an objective 🍨measure of how expensive it is to hold.

A 401(k) comes with two types of bills: plan expenses, which can't be selected or avoided by the investor, and fund fees, which depend on the investments selected. It's always advisable to avoid investments and funds that charge high management fees and sales charges. For example, 澳洲幸运5官方开奖结果体彩网:actively managed funds come with high management fees since analysts are hired to conduct securities research, which can be expensive.

澳洲幸运5官方开奖结果体彩网:Index funds, on the other hand, have generally the lowest fees since they require less management. These funds are automatically invested in shares of the companies that make up a stock index, like the 澳洲幸运5官方开奖结果体彩网:S&P 500 or the 澳洲幸运5官方开奖结果体彩网:Russell 2000, and change only when those indexes change. Usually, investors pay no more than 0.25% in an🔴nual fees🐎.

In other words, once you’ve decided on your risk tolerance and eliminated high-risk or low-return funds from consideration, you should next eliminate the funds that charge high fees.

Diversify

At this point, you’ve hopefully narrowed down the number of suitable 401(k) investments to a much more manageable number. The next step, somewhat coun🐎terintuitively, is to choose a variety of the remaining investments.

You probably already know that spreading your 401(k) account balance across a variety of investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, 澳洲幸运5官方开奖结果体彩网:commodities, and others—while protecting your balance against the risk of a downturn in any one 澳洲幸运5官方开奖结果体彩网:asset class.

Once you’ve decided on a tolerable risk level, made sure you’re not going to pay high fees, and spread your money across a number of asset classes, the trick is to wait. You should fight the temptation to try to time or 澳洲幸运5官方开奖结果体彩网:outsmart the market or trade too often. Review your portfolio periodically, perhaps annually, but try not to micromanage: Your best ally in building up a good retirement portfolio is patience.

The Bottom Line

The range of options available in the average 401(k) plan can be daunting, but there are some ways of narrowing down your options. You should first decide on the level of risk that you are comfortable with. This will depend on your age because older investors should be more conservative with their choices. Next, eliminate any funds that charge high fees. Finally, make sure that your portfolio is well-diversified, and resist the temptation to overmanage it.