How to Pick Investments in My Company 401K for Best Long Term Results

Most company 401K plans have just a handful of investment options to choose from. The number can vary greatly, depending on your company. But an average 401K plan typically offers somewhere between 10 and 30 investment choices. Compare this to the over 10,000 mutual funds and exchange-traded funds that are available according to Morningstar.

Among the investment options for most company 401K plans, they can include…

• stocks
• bonds
• mutual funds
• target-date funds
• index funds

The most common of these within most company 401K plans are target-date funds and mutual funds. However, it’s important to understand each type of investment before moving forward with choosing funds that are available to you.

What Types of Investments Are In My 401k?

Before picking investments, you should have at least a basic understanding of the different types of investments that might be available in your 401K. I’ll keep this as simple as possible for you.

• Stocks: Stocks represent ownership in a single company. When you buy a stock, you own a small part of that company, and your investment grows or declines based on the company’s performance. Your company may offer the option to buy stock in their company within your 401K (sometimes at a discounted rate).
• Bonds: Bonds are loans you make to governments or companies. When you buy a bond, you’re essentially lending money and earning interest in return. Your company may offer this investment choice in the form of a bond fund.
• Index Funds: Index funds aim to replicate the performance of a specific market index, like the S&P 500. They offer broad market exposure at low costs by mirroring the index’s composition rather than an active stock selection as you would find in mutual funds.
• Target-Date Funds: Target-date funds are designed to match an investor’s retirement date. They automatically adjust the asset allocation over time, becoming less risky as the target date approaches.
• Mutual Funds: Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets, managed by professionals. Most 401K plans have several different mutual funds to choose from, ranging from high-risk funds with potential for greater returns to low-risk funds that typically have lower returns.

Which Investments Should I Pick in My 401k?

Since most company 401K plans typically offer mostly target-date funds and mutual funds – this is what I’m going to focus on here.

Stocks (or single-company stocks) are far too risky and volatile and usually aren’t available within a company 401K anyway.

Bonds are less risky, but typically offer a dismal rate of return that may not even keep up with inflation in any given year.

Index Funds can be great and some of these might even be offered within a company 401K – but it will look just like a mutual fund (because really, that’s what it is). So, if your company 401K does offer Index Funds – we’ll treat it just like a mutual fund for purposes of this informative blog post.

Target-Date Funds

Target-Date Funds are investment funds designed to automatically adjust their asset allocation over time based on a specific retirement target date. They typically start with a more aggressive (high-risk) allocation of stocks and gradually shift towards a more conservative (low-risk) mix of bonds and cash equivalents as the target date approaches. These funds aim to simplify retirement investing by providing a set-it-and-forget-it approach, appealing to investors who prefer a hands-off strategy.

However, I do not plan to use target-date funds myself, nor do I recommend them to others who share my investing philosophy. The reason is that target-date funds tend to become increasingly conservative as retirement approaches, potentially limiting long-term growth and returns, especially for those (like me) who are comfortable with market volatility. By maintaining a primarily aggressive allocation throughout retirement, investors like myself seek to maximize growth potential over the long term, understanding that higher risk will likely lead to higher rewards. This approach is geared towards building a robust retirement portfolio that can weather market fluctuations while aiming for substantial growth over time, aligning with a strategy of withdrawing a modest percentage annually to sustain a comfortable retirement lifestyle.

Mutual Funds

Mutual Funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who aim to achieve specific investment objectives, such as growth, income, or a balance of both. Within company 401(k) plans, mutual funds are popular investment options due to their accessibility and diversification benefits. Investors can choose from a range of mutual funds, each representing different asset classes, sectors, or investment strategies.

In the context of company 401(k) plans, mutual funds often include various categories such as large-cap stocks, small-cap stocks, international equities, bonds, and specialty funds. The availability of specific funds may vary depending on the plan. Investors can select funds based on their risk tolerance, investment goals, and time horizon.

I have nearly 100% of my retirement savings invested in mutual funds and this is what I recommend for others as well.

By sticking with an almost 100% aggressive investment strategy while saving for retirement and planning to keep it that way throughout retirement, I intend to maximize my investment growth potential over the years. I understand that taking on higher risk likely leads to much higher rewards down the road. This strategy is all about saving a massive pile of money for retirement so I can easily ride out the ups and downs of the market while expecting significant long-term growth.

I’m planning to withdraw a very low percentage of my retirement savings each year to support a comfortable lifestyle. This strategy allows the vast majority of my savings to go to work for me within my selected mutual funds to significantly grow my wealth throughout retirement using the power of compound interest.

This approach suits those who are okay with market ups and downs in exchange for the high likelihood of greater returns in the future. However, investors need to assess their own risk tolerance and should consult with a financial advisor to ensure their investment strategy aligns with their unique financial goals and circumstances.

What Types of Mutual Funds Should I Invest In?

I have my 401K and retirement savings invested in 4 different types of mutual funds and these are the 4 mutual fund categories that I recommend…

• Growth
• Growth & Income
• Aggressive Growth
• International

You can spread out your retirement savings allocation evenly across these 4 categories (25% in each) or allocate slightly differently depending on your risk tolerance. However, you should have at least some exposure to each of these 4 categories.

• Growth Funds: Growth funds primarily invest in companies with strong potential for capital appreciation. These funds focus on established companies with solid growth prospects and reinvested earnings for expansion. Examples of growth funds within a 401(k) plan could include funds that track indices like the S&P 500, such as the Vanguard Growth Index Fund (VIGAX).
• Growth and Income Funds: These funds aim for both capital appreciation and income through dividends or interest payments. They invest in established companies with steady growth potential and shareholder-friendly policies. Within a 401(k), examples of growth and income funds might include balanced funds that hold a mix of stocks and bonds, such as the Fidelity Balanced Fund.
• Aggressive Growth Funds: Aggressive growth funds pursue high-risk, high-reward investments, often targeting smaller companies or emerging sectors. They seek substantial capital appreciation but come with increased volatility. Examples of aggressive growth funds within a 401(k) plan could include small-cap funds that focus on rapid growth potential, such as the T. Rowe Price Small-Cap Stock Fund.
• International Funds: International funds invest in companies outside the United States, offering exposure to foreign markets and economies. These funds enhance portfolio diversification but carry currency and geopolitical risks. Within a 401(k), examples of international funds might include broadly diversified funds that invest in developed and emerging markets, such as the Vanguard Total International Stock Index Fund (VTIAX).

These fund types provide investors with a range of options for diversifying their retirement portfolios within a 401(k) plan.

How Do I Choose The Best Funds In My 401K?

To identify the best mutual funds within your company’s 401(k) plan, follow these steps:

1. Access Your Plan Details: Log in to your 401(k) account or consult the plan documentation provided by your employer to access information about available mutual funds.
2. Review Fund Options: Look for a list of mutual funds offered within your plan. These funds may be categorized by type (e.g., growth, income, international).
3. Check Historical Return Data: When evaluating funds, focus on the historical return data, using the longest time period available (preferably since inception). This metric provides insights into how the fund has performed over the long term, including periods of market volatility.
4. Compare Returns: Compare the historical returns of different funds within each category. Identify funds with consistent performance and strong returns over the longest available time period.
5. Consider Other Factors: (Advanced) While historical returns are important, also consider factors like fund expenses, investment objectives, risk profile, and fund manager expertise when selecting the best funds for your 401(k) portfolio.

By analyzing historical return data over the longest available time period, you can make informed decisions about which mutual funds are most likely to provide similar returns over the long term going forward.

Example: My FedEx 401K Investment Options

The easiest and best way to show you how to pick investments for your 401K is to show you a real-life example. I currently work for FedEx and these are the investment choices that I have available in my FedEx company 401K plan which is serviced by Vanguard. This table shows the average annual returns for each fund for 1-year (as of 4/30/2024) and since it’s inception date.

Matt’s FedEx 401K Asset Allocation

As stated above, my current asset allocation (the percentages I am investing in each fund) is very aggressive with the expectation of higher long-term returns. I know that my 401K balance will decrease drastically during market downturns, but I’m willing to ride out those storms for the highest possible long-term growth of my 401K balance. Here is my current asset allocation…

• 30% – Vanguard U.S. Large Cap Equity Index Fund (Aggressive Growth)
• 30% – Vanguard PRIMECAP Fund Admiral Shares (Aggressive Growth)
• 10% – Vanguard Wellington Fund Admiral Shares (Growth)
• 10% – Vanguard Windsor Fund Admiral Shares (Growth & Income)
• 10% – Vanguard International Equity Index Fund (International)
• 10% – Active International Equity Fund (International)

Possible FedEx 401K Asset Allocation

Not everybody has the stomach to withstand market downturns like I do. Higher long-term returns with an asset allocation like I’ve chosen also means short-term investment losses along the way. Another asset allocation that will still have fairly high long-term returns and losses that aren’t quite as big during downturns could look something like this…

• 25% – Vanguard U.S. Large Cap Equity Index Fund (Aggressive Growth)
• 25% – Vanguard PRIMECAP Fund Admiral Shares (Aggressive Growth)
• 15% – Vanguard Wellington Fund Admiral Shares (Growth)
• 15% – Vanguard Windsor Fund Admiral Shares (Growth & Income)
• 10% – Vanguard International Equity Index Fund (International)
• 10% – Active International Equity Fund (International)

Building a Diversified 401(k) Portfolio

As you finalize or adjust your 401K investment choices, remember that a well-diversified portfolio can help manage risk and optimize returns over time. By strategically allocating your contributions across different fund types, you can create a balanced portfolio that aligns with your risk tolerance and retirement objectives.

Consider the mix of aggressive growth, growth, growth & income, and international funds in your allocation. This diversified approach aims to capture growth opportunities while mitigating risk and volatility. Regularly review and adjust your portfolio as needed to stay on track with your long-term financial goals.

Remember, investing for retirement is a marathon, not a sprint. Stay focused on your strategy, monitor performance, and consult with a financial advisor for personalized guidance. With a disciplined approach, you can build a robust 401K portfolio that supports your financial future and retirement aspirations.

Keep investing and planning wisely!