5 Tips for Investment Success

If you've left your company retirement plan on automatic pilot because you're afraid to take the controls, you're not alone. A September 2010 study by the Charles Schwab Corp. called "The New Rules of Engagement for 401(k) Success" found that only 47 percent of 401(k) participants feel "very confident" about making investment decisions.

Financial planner Jennifer Lane, founder and principal of Compass Planning Associates as well as author of "The Complete Idiot's Guide to Protecting Your 401(k) and IRA," says many people are so confused about what to do with their 401(k)s and other employer-provided plans that they ignore them altogether.

Instead of dodging decisions in hopes of coasting your way toward your retirement savings goal, follow these five tips to become a more confident, hands-on investor.

Many employer retirement plans will automatically enroll you in a plan, typically at a contribution rate of 3 percent to 6 percent of your salary. That's a good place to start if it at least equals the maximum rate your employer will match. But don't get too comfortable at that level, or with the plan's built-in increases.

Lane says most people need to save 10 percent to 15 percent of their income for retirement, and she notes that some financial planners tout 20 percent as the target amount.

Stuart Ritter, vice president and Certified Financial Planner with T. Rowe Price Investment Services in Baltimore, advocates saving 15 percent.

"If your employer is bringing you in at 6 percent and increasing you by 2 percent a year, it's still going to be a number of years before you get to 15 percent," Ritter says. "The sooner you get there, the better off you're going to be."

One of the most important decisions you will make for your retirement plan is how to divide your investments among stock funds, bond funds and short-term investments such as money market or stable value funds. Your choice should be guided by your risk tolerance and the amount of time you have before you plan to retire.

"Using the target-date funds that a lot of 401(k)s have in them now is a good kind of cheat sheet," Lane says. "You look at the target-date funds for your retirement age, pull up a chart on that fund and look at the volatility. Then you decide whether or not you're willing to take that rough of a ride. If you're not, then back down to a more conservative target-date fund."

Even if you're not investing in a target-date fund, you can follow its asset allocation formula as you design your own portfolio. Beth McHugh, vice president of market insights for Fidelity Investments in Boston, says that as long as you're within 10 percent to 15 percent of the mark for your age group in each investment category, you're generally in good shape.

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