One of the best ways to invest for the long term is inherently built into your 401(k) plan, “Dollar Cost Averaging (DCA)”. Investopedia defines DCA as a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Eventually, the average cost per share of the security will become smaller and smaller giving the investor a lower break-even point.
DCA takes the emotion out of investing. As you may know, it’s emotion that causes investors to lose money when they sell low and buy high out of fear.
You need to determine your risk tolerance and investing time horizon. If you are willing to take risk and have a long time to retirement, you may be an aggressive investor and should select mostly equities. If you don’t like market fluctuations and you are retiring soon, you may be a conservative investor and should invest mostly in bonds and guaranteed investments.
Regardless of your risk tolerance, your portfolio should have a diversified mix of mutual funds. The proper mix is based on your risk tolerance and the investments available in the plan. You should maintain your asset allocation by re-balancing your portfolio back to the original allocation on a periodic basis.
Some 401(k) plans will have lifestyle funds that invest in a portfolio based on your risk tolerance. Insurance company plans usually provides these types of investments. We create investment models using the mutual funds in the plan and these models are re-balanced quarterly. Investment model management is one of the value-added services we provide as investment advisers.
Some plans may offer target date funds. These funds are invested according to the year of your retirement usually in 5 to 10 year intervals. The idea is to be more aggressive when there is a long time horizon and ten adjust the portfolio as the participant gets closer to the retirement age. These investments are like a “set it and forget it” style of investing.
You should speak to the adviser of your plan to help design a portfolio that meets your individual needs.