This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Not sure how to invest your savings? Read on for a strategy that might work really well.
Image source: Getty Images
Maybe you’re saving $200 a month for retirement in your 401(k). Or maybe money is tight and your monthly contributions are limited to $50 right now. No matter what your monthly contributions look like, give yourself a pat on the back for putting money into long-term savings. That’s not an easy thing to do. But you should also know that the money in your 401(k) shouldn’t sit in cash. Rather, you should invest that money so it can grow into a larger sum over time.
But how to invest your money is a different story. And if you feel fairly clueless about that, you’re not alone. A recent Schwab survey found that 73% of savers would like personalized investment advice for their 401(k) plans. Gen Zers are especially likely to want personalized investment advice, with 83% saying they’d like customized tips.
The good news is that if you want personalized advice for your 401(k), there’s a way to get it — hire a financial advisor. But if you’re not ready to take that step, there’s another investment option you may want to fall back on.
Look to index funds
When you have an IRA for retirement savings purposes, you can generally put your money into individual stocks. But 401(k)s usually don’t let you do that. Rather, with a 401(k), you’re typically limited to a number of different funds.
One type of fund you’ll commonly see in a 401(k) is a target date fund. In fact, in many employer plans, target date funds are the default investment option — so if you don’t choose investments for your money, you’ll land in a target date fund.
Target date funds work by adjusting your investment mix based on where you are in terms of a specific target, or milestone. In the case of retirement, a target date fund would have you investing more aggressively early on in your savings window and then investing less aggressively as retirement nears. Target date funds are a good “set it and forget it” investment. And that may be what you want. The problem is that their fees can be enormous.
Similarly, your 401(k) probably has several actively managed mutual funds for you to choose from. But those are also notorious for imposing high fees. That’s why a better bet for you may be to put your money into index funds.
Index funds are passively managed, and their goal is to simply match the performance of existing market indexes. So if you put money into an S&P 500 index, you’re effectively investing in the 500 largest publicly traded companies.
The reason index funds are a good bet for 401(k) savers is that they offer built-in diversification without expensive fees — fees that can eat away at returns over time. And they’re also the type of investment you don’t really have to think about. After all, the broad market is going to do what it’s going to do — there’s not much you can do about that.
But over time, the broad market has a history of rewarding investors who stick with it. So if you put your money into index funds, chances are, you’ll enjoy a similar reward.
It still pays to get customized advice
There’s nothing wrong with wanting personalized advice for your 401(k). And the best way to get that is to find a financial advisor and allow them to help you devise a strategy that’s conducive to meeting your goals. But in the absence of that, you may want to fall back on index funds in your 401(k) until you’re ready to sit down with a professional advisor, or until you find the right person for the job.
Our best stock brokers
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool recommends Charles Schwab and recommends the following options: short December 2023 $52.50 puts on Charles Schwab. The Motley Fool has a disclosure policy.
