Fixing Your 401k

Although it might be a bit too late to move money out of your 401k, it might still make sense to step on the sidelines just in case the worst is not over yet. The Dow Jones Industrial Average, one of the common indicators of the health of the stock market, is close to 6500 points, its lowest point in years.

Most financial advisors will tell you the stock market has its ups and downs. I will most likely tell you the same thing. However, putting most of your money in the stock market hoping to make huge returns for your retirement is just like gambling right now. The market is not following any trends at all.

I would suggest to put whatever money you have in your 401k that you CANNOT afford to lose (in case you lose your job and need to live on it until you find a new job) into a fixed income type of investment, or some sort of a balanced or stable fund to prevent any further losses. Leave whatever money you have left after this spread out to mutual funds. Look into moving into mutual funds that track indexes (usually they will say large cap S&P 500, midcap S&P 400 or something to that effect) since the expense ratio is lower. What this means -- if the expense ratio is low, the fund doesn't need to make huge returns to make up for the expenses it incurs.

As for myself, I put 90% of my 401k funds into a fixed income fund paying 3.5% and left 10% scattered all over large cap, mid cap, real estate and international funds. My future contributions I left alone with the same ratio for now (just because I CANNOT afford to lose this money).

For your future 401k contributions though, I would suggest taking your age from 100, then using that number as a percentage of mutual funds you need to be invested in. The main reason for this is that you already have set aside money that you CANNOT afford to lose in a stable investment, so you CAN now afford to buy cheaper mutual funds. When the market comes back in full swing, you will still be able to catch that wave and make generous returns. Just be careful about market comebacks. Don't put back all of your stable investments into the market unless, and I repeat, UNLESS you can now afford to lose this money.