Avoid 401-K Investing Mistakes
401 (K) plans are one of the most popular retirement investment plans in the US. These plans are classified under the category of defined contribution plans and are primarily offered by employers for the benefit of its employees.
Contributions to a 401 (k) plan are either made by the employer or the employee or by both. It is up to the individual to invest the amount in whichever way he likes. But, usually people make certain mistakes while investing in this type of a plan. Mentioned below are certain pitfalls and ways to avoid them.
Diversification: A diversified investment portfolio is the best means to become a successful investor. The most appropriate kind of diversified investment is to invest in mutual funds. However, people tend to invest their own amount in one single fund due to the simple reason that it was offered by their employer. It is always better to avoid in different types of mutual funds so as to increase the growth potential.
Avoid stocking up: In case of 401 (k) plans, several investors are interested in buying their own company's stocks, in a way to show their solidarity, loyalty and dedication towards the company. However, this can be really dangerous. One should never hold more than 10 percent of company's stocks.
Size does matter: It is important to strike a balance between large-cap investments and small-cap investments. Over a long run, small-cap company stocks are likely to out-perform large company stocks. However, many times investors focus their investment on large-cap funds.
Hidden fees: One big mistake that is often committed by employees is that they do not have any idea about different types of unnecessary charges levied on their mutual funds and other investments. Many times, employers ensure that no additional charges are present in their 401 (k) plans. Ideal ones for investment are those that carry no sales load and have a low expense ratio.