Prev: Where should I be investing my money?
Choose your 401(k) investments carefully. As recent economic downturns have shown, your 401(k) can lose money just like any investment.
You may be contributing money from your paycheck each month to your 401(k), but do you know where your money actually goes? Your regular contributions, along with your employer match, are sent by your employer to your “plan provider,” the company that manages your 401(k) plan, who will then hold and invest the money for you.
The money in your 401(k) account is invested according to your wishes. Your employer’s plan will offer a menu of investment choices, which usually include a selection of stock and bond mutual funds, money market funds, and your company’s stock.
When you sign up with the plan, you specify the investments and the percentage of your contributions that you want deposited into each. You are allowed to change your investment choices over time; ask your employer how often you can do this with your particular plan.
The investment choices you make for your 401(k) are important. They will impact the size of the nest egg you have to play with in your retirement years. Your choices should largely be determined by your age and how many years you have until retirement. You want your money to grow, but you also need to consider the risk of losing money, which means balancing your investments between different types of mutual funds with different risk levels. This is called “asset allocation.” Your asset allocation should shift over the years, as you get closer to retirement, moving away from riskier investments.
To date, there are no restrictions on the percent or amount of 401(k) assets that can be held in your employers stock.
FINRA has issued the following statement about using company stock as an investment in your 401(k) plan:
“The general consensus among financial experts is that an adequately diversified portfolio should have no more than 10 to 20 percent of total investment assets in company stock. If you concentrate much more than that in company stock, especially in a 401(k) plan where there are trading restrictions, you may expose yourself to more company risk that it is wise to incur. Of course, there is no single formula or percentage that suits all investors, so you should consult a professional about what the right mix of investments is for you.”
If you are interested in learning more about how stocks and bonds work, watch this video from Khan Academy
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