In today’s post I’m going to give you a basic primer to get you started on investing in your company’s 401k plan.

So you recently started a new job and your company is offering you a 401k plan. Great! You want to start investing a portion of your income, but you have no idea how to go about it. I’ll give you step-by-step instructions to get you started and simplify the whole process. I started helping out my fiancée in setting up her 401k and I’ll use her plan as an example.

1. If you haven’t already done so, enroll in your company’s 401k plan and get access to your account online. Once you have an account setup you can login and begin researching what investment choices are available. The 401k my fiancée is enrolled in is managed by Vanguard. For you it might be Fidelity or another investment firm.

2. After you login, begin to compile a list in Excel of all the investment options. This can vary significantly from company to company. The firm my fiancée works for offers 21 investment choices in their 401k plan:

Write down each investment option and the ticker symbol. Also make note of what category of sector they fall in.

3. Once you get a list of names or ticker symbols, you can go to google finance to get more info. (For example, if you look up DODGX, you will find the expense ratio as 0.52% and that its a large cap value fund.)

4. This next step is going to be a little more involved, but I promise everything else is simple. The next step I’m talking about is asset allocation; how you will choose to invest your money in all these various options. Opinions will differ in how this should be approached, but I will give you my best take on it.

Let me pause here and say that instead of selecting your own mix of asset allocation you can choose to invest all your money in a target retirement fund. A target retirement fund is an all-in-one fund that matches your retirement date. Initially the fund will start weighted more heavily in stock funds, but as you get closer and closer to your retirement date the fund will invest more money in bond funds. The asset mix starts off aggressive but with high risk and slowly levels off to lower and lower risk. I won’t get into a debate of whether its better to create your own portfolio mix or if you should choose a target fund instead. For me I choose to create my own asset allocation.

First you need to decided how much of you money will be in stocks versus bonds. A common advise that is given is that you should subtract your age from the number 120. This will give you a percentage. (For example, if you are 30 years old: 120-30=90. You should invest 90% in stocks and 10% in bonds.)

The next step is figuring out how to invest that 90% in stocks. For my fiancée I chose the following asset mix:

20% in Large Cap Blend
20% in Large Cap Value
30% in Small Cap Growth
15% in Foreign Large Growth
15% in Foreign Large Value

Why invest in this manner? Although you can’t determine the outcome of how well your investments will perform, you can determine your risk to a certain extent. The crucial point here is that we are not trying to predict the future and anticipate what markets or what sectors will perform well, but trying to reduce our risk by adding diversity to our portfolio instead. History shows us that having diversification in your investment options helps to buffer you from the ups and downs of the market from year to year. (If your interested here are two great articles on this issue: The Ultimate Buy and Hold Strategy and Fine Tuning Your Asset Allocation)

How do you choose between all you options. In each category, choose the option that has the lowest expense ratio. Why? Because there may be years that some funds perform wonderfully and other years that they perform miserably. But one thing that stays constant is the fees and expenses you will pay for investing in those funds. So why not minimize the fee amount if you can.  Some might disagree with me here and ask how I know that the fund with the lowest expense ratio will outperform all the others.  I don’t know.  And neither does anyone else.  You can do research on each fund and compare the ratings, fund managers, etc., but that is out of the scope of this primer.

5. Once you have decided on your investment options, set your contribution settings accordingly in your online account. This is how it looks for my fiancée. You can see that my weighted expense ratio is around 0.76%. Although I wish it was lower, it’ll do for now.

6. The last step is rebalancing your portfolio. As the year progresses, some funds will perform better than others. Either once every year or twice every year, check to see if you need to move around some money to keep you on track with your allocation decisions. (For example if your Small Growth fund begins to grow to 35%, its time to move 5% of the money to other funds that are lacking.)

Hopefully this primer gets you started into understanding the basics of investing in your 401k plan. Remember that no investment choice is without risk, and there are no guarantees of great returns on your investment. But as you begin to understand the basics of your 401k plan, you will hopefully reduce expenses and possibly risk and be on your way to accumulating a sizable investment.