A quote from Barry Ritholtz aptly sums up the unfortunate hands-off approach of many retirement investors:
“I am constantly astonished at how few people actually have any sort of long-term plan other than throwing some money into a 401k or IRA and hoping for the best.”
He’s absolutely right. And while I spend a lot of time discussing the importance of having a 401k or opening an IRA, the next step naturally is actually doing something with those plans once you have them. So how can we balance Ritholtz’s words with action? I have three suggestions:
- Actively Manage Your 401k: Obviously, you still should keep throwing money at your 401k. But, as Ritholtz suggests, “hope” isn’t an investment strategy. You should receive a quarterly statement that provides info on the performance of your account. If you haven’t read it before, start reading. If you’ve been funneling money into a poor-performing fund — especially one where there’s a similarly flavored option that performs better — do something about it. Get out, then get into something else. And even if your holdings have been performing well, take a moment to re-evaluate your time horizon and risk tolerance. Then change your holdings to reflect that. Don’t just “set it and forget it.”
- Actively Manage Your IRA: Whether you roll a 401k into an IRA or open one up from scratch, put your money to work as soon as possible. Unlike a 401k, where you’re automatically invested, you have to pull the trigger yourself to become invested. That’s not to say you always have to be fully invested. Sometimes, “going to cash” in times of uncertainty is a way to prevent losses — but it’s no way to grow your money, so make sure you’re invested as much as possible. Also, remember that unlike a 401k, where you can only invest in mutual funds, IRAs allow you to buy stocks and exchange-traded funds, and there’s a much wider selection as you’re not limited by your 401k provider.
- Reinvest Your Dividends: The magic of compounding works just as well in stock investing as it does in a savings account. So, if you receive dividends (or distributions) from dividend stocks, ETFs or mutual funds, reinvest those dividends rather than just collecting the payouts, if you can afford it. Some stocks — such as ExxonMobil (NYSE:XOM) — make it easy for you via Dividend Reinvestment Programs (DRIP), which automatically buy new shares as each dividend payout allows. However, these plans only are good for buying shares of a stock you already hold, so if you want to diversify, you’ll have to take the payouts and reinvest them yourself.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long XOM.