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This guest post is brought to you by The Digerati Life, a blog about personal finance and investing.
Remember when you landed your first job? That was when you first got a chance to review the company benefits you’d be entitled to as a new employee. While health benefits are standard fare for new employees, good companies will also offer retirement programs such as 401k plans for their workers. For many of us corporate souls, this would be the main avenue through which we learn about investing in the stock market and in such vehicles such as mutual funds and index funds.
In my case, this was exactly how I started investing. I first got wind of the stock market through mutual fund investing via my employer. Over time, I have diversified into other institutions such as mutual fund companies and discount brokers. But all these financial companies offer a whole slew of products, tools and materials that can help any person achieve their financial goals, if one takes the time to study these offerings carefully.
During my first job out of college, I received a heavy envelope through the mail that came from an up and coming online broker called ETrade. Way back when they were a smaller outfit, online investing was a fairly new reality. But I went ahead and checked out the prospectuses that were in the mail packet which included information on various value funds, growth funds, foreign funds, index funds, cash investments, even the company stock! That’s when I picked up the jargon that is commonly used in the world of stock investing and this was the start of my investing journey.
If you have a retirement program available through your company, I would encourage you to take a harder look at how you are leveraging this benefit. Perhaps a review of the process of establishing a retirement account through your employer can prove helpful. Here are a few tips to get started with investing in your 401K:
1. Determine your financial goals.
It’s always a good idea to know what your goals are before you put your money into any long term investment. For those who are young and who are just beginning their investing career, you can afford to be a bit more aggressive with your investment program. Know that risk and reward are highly correlated so the greater the risks you take, the higher your potential rewards.
2. Develop your asset allocation.
The next step is to begin developing an asset allocation that fits your risk profile. Your age, financial and investment goals, and ability to stomach risk is something you’ll need to take into consideration when you work out a diversified investment portfolio for the long term. So how much do you intend to place into stocks and how much into bonds and cash? The answer should yield your asset allocation.
3. Do your due diligence.
Before you commit to certain funds and stocks, it’s important that you review the fees, management and track record of these investments. There are a few things to know about when signing up with a mutual fund: know its goals, what underlying investments are represented and what kind of returns you may expect over time. I wouldn’t invest in something I don’t understand, so I’d recommend getting as familiar as you can with an investment before jumping in. Check out information about these assets and funds from any literature you receive from your employer.
4. Use investment tools and screeners to help you make choices.
You can also learn a lot more by checking out community boards and resources at an online broker like Scottrade, which tends to be supportive of average investors. Do check out such sites that offer free investment tools like stock and fund screeners. These can help you build your portfolio effectively.
5. Understand risk.
Be aware that all investments carry risk, so it is important to keep track of your portfolio on a regular basis. Don’t just invest and forget about where your money is. Over time, your goals and risk profile may change, so your portfolio will need to be reevaluated now and again to see if it still fits your needs and requirements. The most successful investors are those who watch their money carefully and who monitor what they have. You don’t need to be an active investor to be a successful one — occasional tweaks to your plan may be sufficient to keep yourself on track towards your investment goals.
The conventional wisdom is that most investors should invest over the long term for growth of their assets and net worth. One of those long term goals is retirement, and our employers provide a way to help us get there through sound investing via 401k programs. Many employers provide matching savings programs to motivate you to save this way. 401k accounts also have tax benefits, so clearly, investing in them should take some priority in your financial life. The earlier you start investing, the better your chances are for growing your assets over time!