3 easy ways to make sure your 401(k) investments are on the right track
This story is part of CNBC Make It's One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.
When it comes to investing, it's important to understand how your money is working for you. Whether you're setting aside cash for retirement or are simply trying to grow your wealth, you should be in control of your finances.
Take your 401(k) as an example. You likely set up a recurring contribution from each paycheck when you first started your job, but do you know exactly where that money is going?
Here are three things to look at to make sure you're on the right track.
1. Review your asset allocation
First, review your asset allocation, or the breakdown of your investments. Determine what percentage of your money you want to be in investments like stocks, which may deliver a higher return but are more risky, or bonds, which are more stable but may not grow as much over the long run.
An easy rule of thumb often used by financial advisors is to subtract your current age from 110. The resulting number, they say, is what percentage of your portfolio should be made up of stocks. According to this rule, a 30-year-old can comfortably have 80% of their portfolio in stocks, while a 60-year-old is better off reducing risk and keeping that number at 50%. The thinking is that the more time you have left in your life, the more risk you can comfortably take on.
It's up to you to decide what amount of risk you're comfortable with. Depending on what is happening in your life or in the markets, you may decide to increase or decrease your risk exposure. That's why it's important to periodically assess your portfolio to determine if you need to buy or sell assets to hit your target risk level.
2. Look up your expense ratios
Next, review your portfolio fees, sometimes called expense ratios. These are what you are charged for the ability to invest in certain funds. Generally, you want an expense ratio lower than 1% so that it doesn't eat into your long-term compound interest.
Warren Buffett told CNBC in 2017 that fees are one of the most important factors investors should look at when deciding where to park their money. "If returns are going to be 7% or 8% and you're paying 1% for fees, that makes an enormous difference in how much money you're going to have in retirement."
3. Understand where your money is going
Third, take a look at the funds you're invested in. What kinds of companies do you hold stakes of? Do those companies align with your own interests and values? Are there other industries or areas where you would rather invest your money? If so, take a look at other fund options and make the switch.
No matter what, setting aside time to give your investments a once-over every few months will help you keep your money on the right path moving forward.
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