Keep the Course: Importance of Diversification

Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.

The last three weeks we’ve reviewed the various types of mutual funds: cash equivalents, bonds and stock funds. Now that you have a basic understanding of each funds purpose, this article will focus on the importance of creating a diversified portfolio. In a few weeks, the 4th quarter will end, and you’ll receive a copy of your quarterly statement. With the statement will be a disclosure on investing and diversification. Now is the best time to review your elections and asset allocation.

Your company gives you a list of options (typically mutual funds) and you have to divide up your money among those investment options, in the form of percentages, totaling 100%.

Here are a few rules for selecting the investments in your 401k plan:

  • Create a diversified portfolio by selecting at least 4-6 investment options.
  • The younger you are, the more time you have until retirement, so the more risk you can take on. So you can invest more heavily in stock. Some suggest that you subtract your age from 100, and that’s the percent you should put in stock.
  • Choose more than one stock fund to invest in. For example, put 25% in a Large Cap, 25% in a Small Cap and another 25% in an International Fund. The remaining 25% would go in bonds or cash equivalent investments such as a stable value fund or money market fund.

If your plan offers investment advisors, which many do, take advantage of that option, and obtain professional, personalized advice to help you create a diversified portfolio. As always, refer to the plan documents, such as the SPD and prospectus’ for further information.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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