Want to know what not to do with your 401(k)?
I've seen a little of everything in terms of no-no's over the years. These are the classics. From borrowing too much, to being too aggressive or way too conservative. There seems to be no shortage of bad 401(k) behavior.
Here are the classic 401(k) No-No's:
1. Too much company stock. I see a lot of 401(k) investors putting too much money with company stock. Many employers offer it. I would keep this level at 10 percent or less. Remember Enron? All those employees thought that was a great investment too. Having 20, 30 or even 50 percent or more in company stock is a disaster waiting to happen.
2. Too many high-risk investments. I've seen investors put as much as 100 percent of their 401(k) in the most aggressive selection in their menu of options. Do not confuse this with a diversified aggressive portfolio. I'm talking about 100 percent in something like emerging markets or small cap stock investments which are higher risk in nature.
3. Too much money in low-risk investments. On the flip side, having too much in cash or conservative investments with many years left before retirement is a No-no too. The biggest risk in my mind in investing, is not reaching your goal.
4. Leaving your contribution level alone. One of the biggest no-no's I see with 401(k) investors is that they set their contribution level at the amount in which they get the maximum match. That's great you'll be getting all the free money, but it may not be enough savings to fund your retirement. Review this often and increase it every year.
5. Borrowing a boat-load from your 401(k). I've talked about 401(k) loans before. I really hate them. I hate the idea that investors are borrowing from their futures. If you leave and don't pay the loan back in time, you have yourself a nice little taxable event along with penalties for dessert. Consider another source for borrowing like credit lines, credit cards or personal loans.
Avoid these 401(k) No-No's. Keep your money invested loan-free in a diversified portfolio. If you are committing any of these 401(k) No-No's right now. Let's have a talk and make a plan for the future.
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