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Understanding Your Investment Strategy

Now that you have an understanding of how your 401(k) works, the importance of contributing, and how to strengthen your saving potential, you need to know how to choose your investment strategy. For your 401(k) retirement plan to be successful two things need to happen. First, you need to contribute the right amount of money into your account and; second, your money needs to be invested properly based on your risk tolerance and time horizon. Mutual Funds You have a variety of mutual funds to choose from in your 401(k) plan. A mutual fund pools money from thousands of investors. When your money is deposited into a mutual fund, the manager of the fund will invest in a vast number of stocks or bonds from different companies. The failure of one company will not deplete the entire value of the fund. You minimize your risk by investing in a variety of companies and increase your potential to get a good rate of return.

Types of Mutual Funds

Stable Value Fund: delivers safety and stability by preserving principal and accumulated earnings. It is similar to a money market fund, but aims to offer stability and higher returns. Bond Fund: pools together certain types of bonds. A bond is essentially a loan that can be issued by a government and/or their agencies, or by corporations and asset-backed securities issuers to raise money or capital. A bond fund is typically less volatile than a stock fund. Unlike certain types of individual bonds, bond funds do not mature and are not guaranteed. Stock Mutual Fund: pools money from many investors to invest in a group of stocks from a certain variety of companies.

For example: Imagine you are in an elevator, and you have only one cable holding it. If that cable breaks, the elevator will fall to the ground floor. Compare that to having all your money invested in the stock of one company. If the company you invested in fails, your investment can depreciate to zero. Mutual fund investing is different. Imagine you are in that same elevator, but you have 60 cables holding it. If only one cable breaks, your elevator may be slower moving up or down the floors, but it will not crash to the ground floor. Such is the case with mutual fund investing in your 401(k) plan.