401(k) Investment Selections
When you decide how much money will be going into the 401(k) plan where do you put it? In most cases you should have 10 – 20 choices which are usually mutual funds. A mutual fund is an investment company that sells shares of stock and buys existing shares back at the request of shareholders (you) and uses its capital to invest in diversified securities of other companies. It is transparent to you, as it behaves just like a stock does with price fluctuation although the price commonly only changes one per day.
From these mutual fund selections you choose what percentage of your contributions will go into to each investment from every paycheck. Any amount can be chosen in as many accounts as there are available.
What Investor Type of Investor are You?
Tough question perhaps; however, depending on your situation there are general guidelines to follow. The younger people are in terms of years before retirement, they tend to be more aggressive in their choices. This is because there are many years to invest, and the more aggressive selections have a high potential to perform better over conservative options.
On the flipside, they warrant a higher a risk factor. Still, the thought process is that you have many years to invest and so what happens today will certainly be different in the future. If you're older in age and nearing retirement, the thinking becomes that you should scale back and invest more conservatively. This way the investments are hedged when they are drawn from in retirement. If you are in the middle, choosing a mix between conservative and high-risk investments may balance things out a bit.
Investment Performance Indicators
If you are new to investing in 401(k), this can be a bit overwhelming but there are few tips to use as a guideline to help you along. The first task is to review the available funds in your employer plan to review their historical performance.
The best indicator of a fund’s performance is its long-term history, because the recent history does not mean it will stay that way in the future. The longer a fund sustains a good history the more of a solid choice it becomes in terms of stability. If available, view how a fund stacks up against its peers, meaning how well do they perform against the competition.
Your 401(k) provider provides all relevant information about the mutual fund choices. Each one of them has a prospectus that provides information including the fund's investment objectives, fees, risk and expenses.
Employee Stock Ownership Plans (ESOP)
Some companies offer employee stock ownership plan (ESOP). This is where employees can purchase company stock for a discount on the market price. Just like 401(k), contributions for ESOP are taken as a payroll deduction. Simply put, buying company stock is an additional option no different than choosing a mutual fund.