A few weeks back, I talked aboutwhy we should invest. Today I want to talk about company-sponsored retirement plans, which is how most people dip their toes into investing. Specifically, how Id go about choosing the investment funds that go into them.

Investing in your first 401k (or 403b/457 for nonprofit and government folks) can be overwhelming. Everyone tells you you need to do it, but no one tells youhowto actually do it. Maybe youve read all about asset allocation and how index funds are the bees knees. Doing research is a great first step, but for many of us, things are different when you actually have to apply information in a real-life situation. Because once you log into your 401k account for the first time to set it up, youre met with alphabet soup like this:

With often dozens of 401k fund options to choose from, how do you know which ones to pick? And if you cant interpret all the gobbledygook in the chart, how do you know which numbers to pay attention to, and which are just a smoke screen?

Once upon a time, I was in the same boat as you. I was super excited to participate in my first 401k. Calculating how much I could contribute to it was easy. But then I had to figure out which investments to choose. Armed with something called a prospectus, a PDF that detailed every single option available to me, I spent hours Googling every single one to try to figure out which one would make me the most money.

But I dont waste my time vetting every single option anymore. I now look for specific features, and I narrow down my choices throughprocess of elimination. All in all it takes about 15 minutes.

Today Ill walk you through that process, using a real-life example of actual funds we can vet. Im not going to explain every single term, because I honestly dont think you need to know them all to do an alright job. At least, I didnt.

Disclaimer: Im not a financial professional. This post details which factors I would personally take into account when choosing my own investment options. Do your own research before making investment choices.

Ninety-nine percent of the time Id encourage you to act likemy mom. This is the one time Id advise you not to.

My heart sank when I found out my mom had been investing 100% of her 401k money in a money market fund for years. Thats rightshe was invested in zero stocks. Someone equally clueless from work must have checked off that box for her. Money market funds are the most conservative investment fund option, and is like cash investments in terms of returns. Its painful to think about how that money could have grown.

If youre investing in a 401k, youre planning for retirement, which Im guessing is decades from now. You have time to recover if the market goes down, so you can withstand more risk.

The one marked as Short Term in the Asset Class column? I would ignore it, or at least not invest a significant portion of my money in it.

Heres a golden rule of investing:past performance does not guarantee future performance.

You cant control how well your investments will do, but you can control how much you pay to invest. Yes, it costs money to invest. You pay annual fees, an expense ratio, based on the percentage of the assets. This is why I ignore stats like past performance and ratings, and only pay attention to theExpense Ratiocolumn (in the green below).

Looking at the chart, paying a fee like 0.84% seems like nothing, and the most expensive option in the example, 1.02%, sounds totally reasonable. But fees can make a drastic difference in your returns.

When comparing expense ratios, also be sure to note the decimal points. At a quick glance, 0.7% and 0.07% can easily look the same.

Lets compare how those fees can play out over time. If you started with $10,000, and invested $5,000 each year for 30 years with a 6% return, heres how much each will cost you.

A 0.63% difference can end up costing you almost $50,000 more over a span of 30 years. To me, anything over 1% isexpensive. Generally, my benchmark for funds are ones that cost less than 0.5%, but it all depends on what options you have in your 401k plan. If many of them are expensive, then you may have a crappy 401k plan.

Besides expense ratios, there are other fees you can incur, like load fees and redemption fees, but they arent in this specific example. Anyway, I avoid those, too.

Calculating fees can get cumbersome, so all my investment accounts are hooked up to Personal Capital, which has a niftyretirement fee analyzer tool. Below you can see how much Im paying each year per fund.

And below is another screenshot from myPersonal Capitalaccount, where you can see how my annual fees compare to the benchmark, and how much Id lose to fees over a longer period of time.

Ignoring options with high fees now leaves us with about 7 funds out of the initial 30. There are four in particular that I like, highlighted in green. These are calledindex funds. Funds are either passively managed or actively managed. Index funds are passively managed and not only cost much less, but fairly consistentlyoutperformactively managed funds.

How can you tell which one is an index fund? Theyll typically have really cheap fees, less than 0.1%, and the fund names have the word index in them.

Looking at the Asset Class and Category columns, we now havethreedifferent types of stocks funds andonebond fund left:

Now you have to allocate percentages to the funds you pick. You can pick just one fund, or a mix, as long as everything adds up to 100%. How you divvy up your portfolio is an important part of your strategy, and depends on your risk level.

To illustrate, the chart below shows you typical returns based on different allocations. On the very far left is the most conservative, at 100% in short-term investments (what my mom did). Youre not going to get really sexy returns with a conservative portfolio. And on the far right is the most aggressive portfolio, with most of it in domestic stocks and some in foreign stocks. Having 100% of your portfolio in stocks gives you the biggest chance for growthbut you might not be able to stomach the stock market swings.

Going back to our four options, and matching the categories to the chart, we havetwo domestic stock indexes, one foreign stock index, and one bond indexto mix and match.Note: I use charts as guidelines, not for exact proportions for how to put together my own portfolio.

A common recommendation is to make sure your portfolio has both stocks and bonds. There are plenty of quizzes that can help you figure out how to allocate your portfolio, like thisCNN one, although I find most of them to be too conservative.

Since I have several decades until Im touching the money, I go for aggressive growth. And because I value simplicity, I would only pick a few funds. And this is what I would choose:

90% large blend domestic stocks Vanguard Institutional Index I (VINIX)

10% bonds Vanguard Total Bond Market Index Fund (VBMFX)

Most people would add in some foreign stocks, too, but Id rather use a different investment account for that. For my 401k, I like to keep it pretty simple, since the options are limited.

Choosing your own risk allocation can be intimidating. As I mentioned there are quizzes like the CNN one I linked above, or you can connect your investment accounts toPersonal Capitaland it can recommend allocations for you, like below.

By focusing on a few key concepts, investing doesnt have to be nearly as complicated as it seems. And if you can figure it out for your 401k, then you can figure it out for investment accounts you open on your own, too. To recap, some factors to consider:

I hope this post was helpful! And if youre interested in trying the Personal Capital app I mentioned for free, you cansign up here, and well both get a $20 bonus. Win-win.

Theres no right or wrong way to invest, so Im interested to hear about different approaches. What factors do you consider when picking your 401k investments?

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