When it comes to your retirement plan, you want to make sure that you are making wise decisions. After all, your future is at stake. It is true that you want to make sure that you have some risk in your portfolio. Without stocks, even with their risk of loss, it is unlikely that your 401K will grow at a pace that will help you build enough wealth for a comfortable retirement. At the same time, though, too much risk can be devastating. Here are some investments to consider keeping out of your 401K:
Too Much Company Stock
One of the biggest mistakes that many workers make is relying too much on company stock for the future. Indeed, it is often easy to simply go along, allowing the bulk of your 401K to be invested in your employer’s stock. However, it is important to realize that many experts tout the importance of diversity for a reason. If something happens to your employer, you might find that your 401K is completely wiped out. Make sure that you have a reasonable amount of diversity across industries and companies so that your future is not dependent on the performance of one company.
Today’s “Hot” Tip
There are any number investments that appear “hot” right now. Indeed, you might see that some investments provide great returns at the moment. It can be tempting to add them to your 401K in the hopes that it will result in vast riches down the road. Unfortunately, today’s “hot” tip can turn into tomorrow’s complete disaster. For your 401K, it is often a good idea to stick with investments that have a proven track record and solid fundamentals. You can chase “hot” tips with money you can actually afford to lose.
Commodities and Currencies
While some commodities and some currencies can provide a little bit of risk to a 401K, with the potential to boost your nest egg, it is important to note that these types of investments are often considered too volatile to truly be a good idea for a 401K. Indeed, the volatility of these types of investments makes them hard to predict — and it means that losses can be potentially devastating. It is usually a good idea to stick with stocks, bonds and cash for a retirement portfolio. It may be boring, but these basic investments are perceived as less risky, and an appropriate mix of stocks, bonds and cash can create a solid 401K that has a reasonable chance of sufficient growth, with some protection against huge losses.
While it is possible to add real estate to your 401K, it might not be the best idea. You can only invest for income appreciation when it comes to real estate in your retirement plan, and that means that you can’t deduct depreciation. You also have to realize that there are plenty of rules that come with having real estate in your retirement portfolio, and the ins and outs can get complex. In many cases, it is just easier to avoid real estate, since a mistake can cost you big time, devastating your future. On top of that, we have recently been reminded that real estate does not always appreciate, and that you could be stuck with lost value on an illiquid investment. Your future self will be grateful if you consider relatively liquid investments for your 401K.