Each type of investment has its own degree of certainty and uncertainty. Since all investments perform differently, one way to manage risk is to diversify your portfolio by investing in a blend of different types of assets. Keep in mind that 401(k) options are not federally insured, and past performance is not a guarantee of future results. Your employer’s 401(k) plan will most likely offer you a variety of investment choices. Asking the right questions will help you decide on your best investment strategy.
- Have I learned all that I can about each 401(k) investment? For mutual funds, the prospectus and financial magazines are good sources of information. For other types of investments, talk with your plan administrator.
- How has this 401(k) investment performed in the past? While past performance is never a guarantee of future performance, it will help to give you an idea of how the different types of investments have performed over time in up and down markets.
- How long do I have before I’ll need the money? If you can leave money in a 401(k) fund for 10 to 15 years or more, you may be able to ride out the ups and downs of the stock in the mutual fund. Over time, stock mutual funds have generally outperformed other options. Keep in mind that some 401(k) plans limit the number of times you can transfer your contributions from one option to another. Some plans let you switch monthly, others quarterly or yearly, while some others allow transfers on any business day.
- How should I "mix and match" my 401(k) investments? Most financial professionals recommend that you allocate your assets to a variety of investments. Put some of your money in conservative investments with stable rates of return and distribute other assets in investments with greater potential for gains and higher risk. Your ideal "mix" will depend on your circumstances, goals, and tolerance for risk.*
