5 Things You Should Do Before Opening a 401(k)


Pick Your Portfolio

You'll have an array of investment options available through your 401(k) plan, usually a selection of stock mutual funds, bond mutual funds and money market mutual funds. Your investment portfolio should include a mix of investments in a variety of industries to shield your retirement savings from shocks to a particular market and produce steady returns -- a concept known as diversification.

The specific makeup of your 401(k) should reflect how long you have until retirement, as well as the amount of risk you can accept. Stocks typically offer better long-term growth than other types of investments. Consider choosing an index fund, which invests evenly across the stocks in an index like Standard and Poor's 500 and pays a return equivalent to the market's average. The management expenses are lower compared to actively managed mutual funds, which are directed by analysts who select stocks they expect to perform well. Over many years, index funds typically offer better returns than actively managed funds after fees and expenses [source: Hulbert.]

Your portfolio should also include corporate bonds and treasury bills, which generally are considered safer investments than stocks and should comprise more of your portfolio as you near retirement. This prevents stock market volatility from wreaking havoc on your savings.

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