401(k) Step 2_ Slicing Up the Pie
Some Investment Options for Your 401(k)
There is no such thing as starting too early when it comes to 401(k) retirement plan. The longer time your investment compounds the more your saving will be by the time you retire. But compounding alone is not enough as long as there is such thing as inflation. This is the reason 401(k) offers a number of investment options you are likely to find overwhelming to make you choice from.
A 401 plan typically offers the following main categories of investment choices:
•Stock mutual funds
•Bond mutual funds
•Money market funds
Stock (or equity) mutual funds have the pooled amounts of money invested in stocks, which represent part ownership in corporations. The goal stock ownership pursues is to see the value of the companies they’ve invested in to increase in over time. The average return on this investment category is 10.4%, and with years it may be from -40% to +50%. Stocks entail the risk of losing 10-30% of their value within a few days and over half of their value within a year or two.
Bond mutual funds have the pooled amounts of money invested in bonds, which are debt or investor owned utility (IOU), issued by government or companies. Bonds are called fixed-income investments, since the purchaser usually collects regular interest payments, which are fixed percentage of the amount they’ve invested. The average return on this investment category is 4% – 8% a year. Bonds are estimated being from very safe (in case of U.S. Treasure securities) to moderately risky (in case of so-called “junk” or “high-yield” bonds).
Money-market funds (and stable value accounts) offer steady and reliable growth of your savings but at a limited rate. Though this type of investment offers little reward – around 2% – 5% a year, the risk it entails is also very low, since it consists mainly of U.S. Treasury securities or certificates of deposit.
And even with this information you’ll still have hard time opting for an investment category. The best decision is to have a broadly diversified portfolio. But it still needs to be rebalanced regularly. If you are lucky, your 401(k) will offer you target retirement funds that provide a reasonable asset allocation with automatic balancing of your investments, based on your age and when you’re going to need the money.
Investment Options 401(k) Features
401(k) offers an array of investment options to choose from. You can make a portfolio of balanced investments depending on your age and the level of risk you are ready to face.
