Let’s take a break today from the Russia-Ukraine war, the bloody mayhem in Gaza, monetary policy, domestic political strife, and inflation fears. It’s healthy for investors to sometimes step back from the hurly-burly and think strategically.

Below, I examine a topic that’s crucial to the retirement security of millions of Americans: the 401k plan.

Americans have a lot at stake in their 401k plans. As of this writing, 401k plans held an estimated $6.2 trillion in assets and represented more than 19% of the $32.3 trillion in U.S. retirement assets.

More than 58 million American workers are active 401k participants, encompassing more than 580,000 401k plans. The 401k is the most commonly owned retirement account in the United States.

And yet, many investors are taking a passive approach to their 401k plans. They’ve put their 401k plans on automatic pilot and really don’t seem to be in control of their retirement money. That’s a big mistake that could come back to haunt you in the form of underperforming assets and missed opportunities.

Here are seven steps that will help you get a better grip on your 401k.

Step #1: Calculate your net worth

In a global economy where information is as much a commodity as widgets or weed whackers, it pays to know what you’re worth. That’s where calculating your net worth comes in handy.

Your net worth, also known as a personal balance sheet, gives you a blueprint for your financial life, one that you can work from again and again as you make lifetime financial decisions. It’s a fluid document that you’ll need to revisit every six months or (at the outer limits) every year, but you’ll be glad you have it.

Quantifying your financial goals is critical in the investment process and your personal balance forms the yardstick by which you can measure the success of your financial plan. As time marches on, you can tweak the strategy for your financial plan along the way to achieve your defined goals.

How to create a personal net worth statement:

1. List your assets (what you own), estimate the value of each, and add up the total.
2. List your liabilities (what you owe) and add up the outstanding balances.
3. Subtract your liabilities from your assets to determine your personal net worth.

If you need help making these calculations, here’s a worksheet:

Step #2: Know your objectives

Any good marksman will tell you the key to hitting a target is actually having a target. Having something to aim at, to work towards, gives you the framework for a successful personal portfolio plan.

Define your portfolio’s purpose. Here are some examples: to reap a lot of money over the short term, so you can make a big purchase such as a house; to generate reliable, future cash flow in retirement; to grow the family estate for your kids and grandkids; to set aside ample cash reserves for entrepreneurial investment opportunities; etc.

Step #3: Know your risk tolerance

This is crucial. If your portfolio takes a sharp turn for the worse when you’re in your 40s, you still have plenty of time to bounce back. But if your investments take a nosedive while you’re, say 65, you’re in a far worse predicament.

Always know going in what you can afford to lose and, going forward, manage your portfolio correspondingly.

Knowing your risk tolerance will help you decide which investment strategy is right for you. For example, if you have a low risk tolerance, you may want to emphasize safe haven investments even though your time horizon indicates you could be more aggressive. (For our special report on safe, high-income stocks, click here.)

Evaluating your timeframe can be critical, particularly when building a portfolio based upon a projected retirement date.

Consider your stage of life. For example: relative youth (aggressive growth); middle age (moderately aggressive); retirement in the next 10 years (income and moderately conservative); retired (stability and income).

There are several variations. Chose a category based not only on your approximate age, but also on your tolerance for risk. As long-term market history amply shows, you’ll have to withstand a lot of bumps along the way.

Step #4: Diversify your assets

When your investments are diversified, or spread across different asset classes or types of securities, they work together to help reduce risk.

Go ahead and enjoy the benefits of slow and steady blue chip stocks along with potentially higher-flying growth stocks. Mix in some U.S. Treasury Notes with those international bonds. Spread the wealth and secure portfolio performance in the process.

Step #5: Allocate your assets

Asset allocation means investing across a variety of asset classes, with the objective of determining the optimal mix of assets for your portfolio to properly withstand, and adjust to, changing market conditions.

Usually that means branching out among the four main asset classes: stocks, bonds, cash and metals. The difference between diversification and asset allocation is that the former is the “macro” big picture theme and the latter is the “micro” nuts-and-bolts theme to building your mutual fund.

Yes, you should diversify your portfolio. But how you do that is what’s known as asset allocation.

Step #6: Determine a minimum rate of return

What’s your self-imposed requirement for a minimally acceptable return? Do you want to reap at least 10% a year? Do you want to at least equal, or beat, the S&P 500? The younger your age, the higher you can set your goals. But be realistic.

For context, here are the S&P 500’s average rates of return over three 30-year periods:

Step #7: Properly research fees

Do you know how much you’re paying for your 401k? If you’re like most people, the answer is no. According to one study, 401k fees were so high (compared with an index fund) in 16% of the plans that, for young employees, these fees consumed the tax benefit of investing in a 401k plan.

Most 401k plan participants aren’t even aware that they’re paying 401k fees, but many mutual fund providers charge more than 1% of your total assets in investment management fees.

To maximize your long-term wealth building strategy, you need to understand these fees and scrutinize your 401k plan packet for them.

Overall, as an investor, you’ve got to do your homework.

Read prospectuses, check company financial statements, and keep reading the publications of Investing Daily. In the meantime, always feel free to drop me a line. I’m here to help: mailbag@investingdaily.com.

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John Persinos is the editorial director of Investing Daily.

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