The Automatic Millionaire, Expanded and Updated A Powerful One-Step Plan to Live and Finish Rich by Unknown

Author:Unknown
Language: eng
Format: epub

WHAT ABOUT INVESTING IN MY 401(k) PLAN?

The investment pyramid can help you select how to allocate the money you

put into your 401(k) plan. Chances are, your plan will offer you a menu of

investment choices quite similar (if not identical) to the ones listed in the

pyramid. If so, you can simply use the percentages from the pyramid to

distribute your dollars appropriately. The only noticeable difference may be

that if you happen to work for a large, publicly traded company, your plan

will also offer you the chance to invest in your company’s stock. If it does,

please resist the temptation to overinvest—no matter how great you think

your company is.

In recent years, too many overly loyal employees have lost their entire nest

eggs because they invested all their retirement money in their own company’s

stock. Keep in mind names like Enron, WorldCom, and Lucent Technologies.

Until the roof fell in, everyone thought these companies were sure things—no

one more than the people who worked for them. When the recession hit, even

employees at what were considered stable banks like Bank of America and

Citibank saw their equity (that is, retirements) nearly destroyed. There were

employees at these banks who were getting ready to retire with the bulk of

their net worth in company stock, and overnight their nest eggs were down by

90 percent! In my view, you should never invest more than 25 percent—and

if you want to be conservative, not more than 5 percent—of your retirement

money in your own company’s stock. Moreover, when you use the Automatic

Millionaire Investment Pyramid, consider your company’s stock to be an

aggressive growth investment (even if it’s a conservative company). This is

because owning a single stock reduces your diversification—and therefore

increases your risk. The same thing applies if you work for one of today’s

“perfect” companies like an Apple, Amazon, Facebook, Netflix, Google

(insert today’s hot company name). Today’s perfect company can change,

often overnight. I don’t want your life savings at risk!

SUPERSIMPLE ONE-STOP SHOPPING

Many company retirement plans offer participants a one-stop mutual fund

choice that combines under one “roof” all the different kinds of investments

you need to make. As a result, you don’t need to worry about whether you

may have confused an aggressive growth fund with just a growth fund, and

vice versa. Nor do you need to figure out what percentage of your money

should go into bonds versus stocks.

This supersimple kind of investment goes by a variety of names.

Depending on the plan, it might be called a target dated mutual fund or a life

stage fund. Some of these funds have a specific year in their name (for

example, the 2030 fund or the 2040 fund), the idea being that you select the

fund closest to your projected retirement date. Most companies also offer

what is called a balanced fund. A balanced fund offers professional

management and an asset allocation that is typically 60 percent stock and 40

percent bonds. Some companies may be now offering a version of the robo

advisor model I discussed before, primarily using ETFs and index funds to

keep costs low. Also many companies are now offering a service provided by

a company called FinancialEngines (www.financialengines.com) to

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