2. Invest in a broadly diversified portfolio of low-cost ETFs (exchange traded funds) and index funds.
Keeping your costs low is surefire way to reap higher returns. Over time, tiny percentage charges and or small fees add up — for a median-income two-earner family, they will eat away almost one-third of their investment returns in a 401(k), according to a study published by the public policy organization Demos, The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s.
Going with index funds and ETFs not only keeps your costs low, but it also limits your risk. “With an index approach, where you’re investing in mutual funds or ETFs that allow you to get access to over 8,000 individual positions, you’re not at risk of one company going bankrupt or falling out of favor with the market,” says Wallin.
3. Don’t try to beat the market; participate in it.
In trying to beat the market, investors usually underperform not just the market, but even the investments they choose, because they buy and sell at less than optimal times.
“Virtually no one goes through a bull market and a bear market and comes out better than an index fund,” says Michael Kitces, partner and director of research for Pinnacle Advisory Group and financial planning blogger.
To participate in the market’s gains over time, Wallin suggests creating a portfolio diversified across different asset classes — large cap, mid cap, small cap, U.S., international developed, international emerging, etc. — and then depending on how far you are from retirement, or how much risk you want to take, determining the balance of stocks versus bonds. Regularly invest a portion of your paycheck or other money so that you’re not timing your trades but just making investing a habit.