I'm not any kind of financial wizard, but I can tell you what I know from personal experience. When it comes to 401k most plans offer several investment options. You can distribute your savings to the different offerings based on a percentage of the total amount of money you have saved. Some of the typical offerings are:
Very conservative investments, almost like a savings account. You won't earn a lot of interest, but you won't lose a ton if the stock markets go south. In any given year you could increase or decrease your investment amount by a few percent.
Moderate investments, slightly more risky with a better return on your investment. In any given year you could increase or decrease your investment by roughly 6 to 8 percent.
Aggressive investments, very risky - you could lose up to 10 to 15% of your investment in a year's time. You could also increase your investment by the same amount.
International investments, very very risky. You could earn 20% in a year or lose it.
The best way to handle your investments is to spread them out over several different risk levels. I usually go with 25% each in Conservative, Low Risk, High Risk and International. That way if the market is good I am earning a decent interest. If the market is bad, at least my Conservative funds won't go down the drain.
The key thing is to base your investments on when you plan on retiring. If you are 10 to 20+ years from retirement you should be more aggressive as you have more time to recover from losses. The market is cyclical and eventually you will earn a better return. If you are less than 10 years from retirement keep most of your investments in moderate to conservative investments. If you are less than 5 years from retirement put all your money in the most conservative funds and keep it there.
One other thing, check your fund performance and adjust the allocation of your savings a couple of times a year at the most. If you watch it more frequently you will be tempted to move money out of a poor performing fund and into one that is doing well. This is a no no. The money you have in a fund is based on a certain number of shares in that fund. If you take money out of a fund when it is down you have a real money loss as opposed to a paper loss. If you leave the money in the fund until it recovers and shows a positive return you will not have lost money. All fund performance is cyclical and eventually a poor performing fund will begin yielding a higher interest rate.
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