As I mentioned before, I got a new job! And with that job came a 401(k) that the company matches up to 4%. So, as any personal finance person knows, I’m going to definitely contribute at least 4% to my 401(k). Hello! Free Money! Always a good perk.
The difficult part is deciding what to invest in. I have to consider my whole retirement portfolio, not just my 401(k), as I’ve got a Roth IRA that I’ve been trying to fully fund each year, plus a rollover IRA for my last job’s 401(k). It also sounds like I am allowed to roll money from the rollover IRA into my new 401(k) (according to the paperwork I got from work), so I’ll need to decide if I should do that. It seems a bit like it’s a draw either way, as they’re both from pre-tax contributions, so there isn’t an obvious advantage either way. It would probably just help to get a better idea of my portfolio if I have fewer separate accounts to consider. I’ll think about it a little more before I decide.
As for the portfolio decisions, I’m thinking I want to select a wide variety of funds. The options available in this plan are pretty good, as they encompass all sorts of investment strategies and comfort levels. They have funds that fit any combination of the Morningstar style categories (Small, Mid, Large; Value, Blend, Growth). There are also funds with certain sectors of stocks: Technology, Healthcare, Real Estate. They also have a fund that helps you buy stock in the company. I know in terms of the company stock, I wont put too much in that one. I don’t have anything against the company, I just know it’s a bit risky to have too much of your portfolio invested in one stock, especially if the stock is for your own company. You’re that much more dependent on the success of your company. Plenty of former Enron employees were in horrible financial situations after the company went down the tubes because they not only lost their jobs, but they also had been heavily invested in the Enron stock (I believe the company match in their case was company stock). When a large part of your portfolio ceases to exist, you’re in for trouble! All that aside, I have confidence that my employer is going to be around for a while, so I’m not too worried about that sort of thing happening. But it always could. So, like I said, I wont be investing too much into their stock.
I think I realized something weird. My investment strategy is a bit weak. At my old company’s 401(k) plan, I basically looked for funds with high Morningstar ratings (4 or 5 stars) and that fit in the “growth” category. I figured that I should go for the growth funds, as I was under the impression that those were the best ones for young people like me who can handle short term instability in favor of long term gains. I’m now not quite sure I should have had most of my money in Growth funds, as Value funds take on a different approach, but could still be just as risky. As this article states, Growth funds depend on the fact that the funds have a lot of momentum, and so they can increase fairly quickly. The downside is that the momentum works in both directions, which means you could end up with a considerable loss. So that’s why those are considered good for long term investments. The Value funds, they explained, look for cheaper investments with the hope that they’ll increase in value. It’s that whole basic idea of “buy low, sell high”. And Blend funds, as they state, are the funds that don’t fit on either side. They may either have a combination of the Growth and Value funds, or they may just have a wide variety of investments that act as a good portfolio diversification. So, I think I had used the fact that Growth is volatile to mean it was okay for young investors, as most investment guides say that younger investors can handle the short term troubles that can arise.
So, I guess all this discussion, and I’m still not quite sure what to do. I’m interested in putting a little bit towards the company stock, and a little bit in the Technology fund, but other than that, I’m a bit in the dark. They have life-cycle funds available, but I figured I’m too heavily invested in those as it is with my Roth and rollover IRAs. I’ll just enter a tentative portfolio initially to get myself enrolled in the 401(k) and start getting the matched contributions. I’ll just have to adjust my portfolio once I actually take a little more time to do the research on the individual options available.
I’ll probably also increase my contribution after a while. Right now the plan is to contribute up to the match. I did sign up with the option they have available through the 401(k) to increase your contribution by a 1-3% each year. I set it to increase by 1% every year. I’m not sure when exactly it will stop increasing, but I’m okay with it for now. I guess the idea with it, in part, might be that you intend to get raises at certain times of the year, and so you can keep a similar take-home pay as before, but start contributing more to your account. It’s also helpful so that you can start off with a minimal amount coming out of your paycheck, and as you go, you’ll be more comfortable with it as you build up emergency savings and other investments.
Oh, one thing I noticed, I mentioned Morningstar a good amount in this post. This isn’t a sponsored post or anything. It’s more of what I first heard about when I was setting up my portfolio for my last 401(k).
Well, I’d better get to bed soon. I’ve found that I can get a heck of a lot more tired these days, now that I’ve started working, which includes waking up a lot earlier than I’d been getting used to.
Next step in determining what to do with all the company benefits: select a medical insurance plan. They have 5 options available, and I’ve got to sort through all the pros and cons of each. More on this later!