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Getting the Most Out of Your 401(k) Investment


You're stashing away money in your 401(k) for the Palm Springs retirement home.

Nothing to do now but sit back and watch it grow.

Actually, it isn't that easy. There are practical steps you can take to boost the value of your 401(k), although they require patience and the ability to look at your nest egg as a long-term investment.

Earning a double-digit annual return isn't out of reach at all. Here's some advice from investment experts on how to do it.

1) For starters, do the obvious.

Take advantage of your plan to the fullest extent possible, especially the matching contributions offered by your company.

"If your company matches 50 cents on the dollar, where else are you going to get a 50% return immediately, guaranteed? If you aren't putting in the same amount as they will match, you are turning up your nose at a gift," said Eric Schurenberg, Money magazine assistant managing editor and author of "401(k): Take Charge of Your Future."

2) Don't act like a trader.

You probably aren't a full-time investor, so don't pretend you can time the market to improve your results. What is important is to select sound, long-term strategies.

"There's no doubt that anybody can improve a 401(k) return long-term. But don't try to convince yourself that you are the next Warren Buffett. In the retirement arena, you have to have a longer-term outlook," said David Evans, executive vice president with Scarborough Group, an Annapolis, Md.-based company that advises employees on 401(k) plans.

3) Keep your knees from jerking.

Don't get spooked by market fluctuations, and don't overreact to news events or media reports.

If the market tanks for a week or two, don't suddenly shift all of your money to safer, lower-returning investments. No doubt those who shifted their funds after the sharp market downturn in July are regretting it now.

It's something younger workers should especially keep in mind. There will be plenty of ups and downs in the market over the next 20 to 30 years, so don't let short-term fluctuations concern you.

4) Take some risks

The obvious way to boost your returns is to gamble a little bit more, which means betting more heavily on stocks and less on conservative income funds. Over the long run, stocks have proved to post the best returns.

In most cases, the riskiest investments available for 401(k) participants are relatively tame. In other words, the plan probably doesn't allow you to put all of your money into junk bonds.

Keep a little bit in the safe investments, so you won't get too depressed during those times when the market does fall.

5) Go global

Economies in some parts of the world--especially in Asia--are booming. Some of the biggest returns in the next few decades will come from investments in companies there.

Evans advises that people wanting more aggressive returns put as much as 40% in global investments.

6) Find out what's behind the generic descriptions of your investment options.

Does your company offer a global fund? An income fund? An equities fund? What exactly do those terms mean?

Check out the fund prospectuses to learn the details. You might find that a fund described as "global" is invested heavily in domestic stocks.

7) Don't put on the brakes when you are nearing retirement.

Even if you are close to retiring, don't view your 401(k) as something that ends the day you walk out the door. Retiring means you'll be leaving the company. It doesn't necessarily mean you'll be tapping the nest egg right away.

Some of your money may not be needed for 10 years or more, so don't automatically put it all in lower-returning, safer investments.

8) Don't put excessive amounts of money in your company stock.

The only 401(k) investment option that isn't diversified is your company stock portfolio.

As a rule, no more than 10% of your 401(k) investment should be in your company stock, Schurenberg advises. What's more, your company may already be giving you plenty of stock in matching your contributions.

"You already have too much riding on the health of your company: your salary, job security and health benefits. Why drag your 401(k) into it?" he says.

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