Mistake: Paying too much or too little attention to the account.
The good news is that you started funding the plan, but now what? Like any investment, company sponsored retirement plansshould not be ignored, but over-managing can be just as dangerous.When you initially signed up for the plan, maybe you chose the money market to get started and never changed it, or you chose the S&P 500 Fund for all the money, but now you are older and are invested too aggressively. Sometimes, the plan will change fund options and employees just go along with the changes but never investigate if the new funds offered are actually what are best for them. The fact is that circumstances in life change and, as you age, allocations and risk tolerances should be adjusted. So it is important to not take a “set-it and forget-it” approach.On the flip-side, over-managing can lead to problems as well. Because of the nature of how investing into a 401(k) or 403(b) is set up, you are allowed to take advantage of a dollar cost averaging approach. This means that every pay period, the same amount of money goes into the same funds. So when the prices drop, you buy more shares and when prices rise, you buy fewer shares. If you over manage by changing funds frequently due to market panics, then you lose the dollar cost averaging advantage and possibly find yourself buying high and selling low, a strategy designed to fail. Assuming that you are not touching the money in this account for a number of years, a better strategy is to leave things in place during the volatility.Solution: Review your accounts on a semi-annual basis. Taking a more systematic approach will allow you to re-allocate based your risk tolerance, timeline and model that is best for you. By doing this, you will be forcing yourself to sell sectors that have appreciated and buy others that have underperformed. In other words, buy low and sell high – a winning strategy over the long run. Finally, do not be afraid to turn to a professional for help when you need to, especially, if you are already working with a financial planner as he or she can help you review your plan options and choose reallocations when necessary.
Over managing your 401(k) account is probably the main reason for under performing. Remember your retirement account or portfolio is like a bar of soap the more you touch it the smaller it gets.
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