Let Me Clarify

There’s certainly no shortage of books, videos, and expert advice on how you should invest. It’s never been easier to find information about asset allocation, complex tax strategies, specific fund selection, you name it! However, the abundance of “expert” knowledge at our disposal can sometimes work against us by overcomplicating things or by placing too much emphasis on one topic.

Allow me to clarify (pun intended) through the broader lens of investing.

I would argue that as important as investment selection, rebalancing, asset location, etc. are, there’s a period where your mental energy might be better spent focusing on discipline, savings, and behavior.

Although I personally find it fascinating, I won’t bore you with all the behavioral psychology reasons behind setting a solid mental foundation, so instead let’s approach this from a number’s standpoint.

$328,571

Assuming a 7% rate of return (the historical average of the stock market), $328,571 is the value at which a 401(k) would grow more from that rate of return than it would through maximizing contributions ($23,000 for 2024).

To put it simply:

• If your 401(k) balance is less than $328,571, then trying to maximize your contributions would have a larger impact than average market returns.
• If your 401(k) balance is more than $328,571, then average market returns would have a larger impact than maximizing your savings rate.

Of course, there is always more to it. Not everyone should be invested 100% in stocks and/or expect similar returns. Not everyone can afford to max out their 401(k) each year. Some individuals are eligible for greater catch-up contributions. As I’ve always said, every situation is a bit different than the rest.

So, try this exercise for yourself. Take your 401(k) balance and divide it by an appropriate rate of return. If you aren’t sure what an appropriate rate of return is, maybe use the 7% historical average as a starting point. If the result is less than the amount you currently save on an annual basis, maybe you’re better off spending your time on cash flow, automating savings, and increasing your savings rate over time. And if the result is greater than the amount you currently save on an annual basis, placing a bit more emphasis on your asset allocation, asset location, specific fund selection, and other finer details might make more sense (while maintaining your disciplined savings of course!).