How to Turn Your 401(k) Into an 801(k)

   

How to Turn Your 401(k) Into an 801(k)

Instead, this is a time for action. It’s not too late to build wealth and prepare for retirement. Even if your account has shrunk significantly in value, you can recover.

I’ll show you how.

The first step is to acknowledge that there is a problem. Too many individual investors fail to realize that there is a problem. There is a problem, and it’s a big one.

The professionals will tell you that this is just the market being the market. Volatility comes with the territory. I can just bet your plan administrator is full of warm fuzzy statements in your monthly 401(k) update. (See also: "6 Ways to Salvage Your Cracked Nest Egg.")

"Stay the course," they say. Or if they’re really thoughtful, they’re telling you to reallocate your portfolio. "This too shall pass" is a common hand-holding technique of plan administrators that are not equipped to deal with a true crisis like we are currently experiencing.

The second step in any plan to build an 801(k) is to take control of your own destiny.

The establishment of the 401(k) program was a well conceived response to the end of corporate funded pension plans, but 401(k)s are not the end-all, be-all that some may think. Although there are many positives, the negatives are now front and center with the credit crisis and market crash.

The biggest issue, in my humble opinion, is…

the limited investment options in most 401(k) plans. Despite improvements in available options, there are simply too many handcuffs on the plan, and those handcuffs prevent action by investors that want more than buy and hold investing. (Are you making these 401(k) mistakes? Find out here.)

I won’t go so far as to say that buy and hold is dead, but I will say that active management, even if those actions are limited in scope, is clearly the way to go. That means having as many options available in the tool belt and those options are not available in most 401(k)s.

If we have learned anything during this bear market it’s that flexibility and trading are winning the day. With most 401(k)s, flexibility and trading are limited.

The third step in turning your 401(k) into an 801(k) is to gain more flexibility with your investments. The way to do that is to roll your 401(k) over into an Individual Retirement Account (IRA).

With the IRA, you take control. Instead of being limited to plan constraints, an IRA offers flexibility. More importantly, if you’re so inclined to trade your account—which is necessary from time to time—you have the ability to do that more effectively in an IRA.

Now, once you have control there are no excuses. You can either manage the money yourself or hire someone to do it for you. In either case, I’m most certain you will do better than the returns generated from plain vanilla 401(k) plan options. (See also: "10 Commandments for a Secure Retirement.")

If you do it yourself, you need to have a singular focus on making your 401(k) an 801(k). That means investing in a way whereby you can double the value of your portfolio. I’m not talking about tomorrow but in the long-term.

Before I make any investment, I ask myself one question…

Is this a stock that can double in value over the next 3 to 5 years? If the answer is yes, I buy. If not, I don’t.

It’s that simple.

Forget about owning mutual funds, especially index funds (exchange traded funds are ok). It’s not reasonable to think you will double your money using such generic vehicles. (See also: "ETFs vs. Index Funds: What You Need to Know.")

The final step is to make sure that you don’t fall asleep at the wheel. While it is important to let your investments mature unencumbered by emotional selling, it would be a mistake to simply buy and forget.

Use the business cycle to your advantage and be willing to move your portfolio to cash when the cycle is ending. Doing so in the current environment would have protected your 401(k).

That’s beats what any plan administrator will do for you.

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.


Article printed from InvestorPlace Media, http://investorplace.com/2008/11/401k-into-801k/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.