Among the most important — and perhaps most intimidating — decisions you must make when you participate in a 401(k) plan is how to invest the money you are contributing to your account. The investment portfolio you choose determines the rate at which your account has the potential to grow and the income that you will be able to withdraw after you retire.
A combination of stocks and bonds is the main vehicle for long-term investing, but there is no single answer when it comes to deciding how much of each should be in a 401(k). Broadly speaking, it is usually recommended that younger people should own more stocks while investors nearing retirement should own more bonds.
Investors buy equities, which is simply another name for stocks, in order to generate growth. Why? Because stocks usually generate much larger earnings over time and are therefore considered better for long-term portfolio growth.
Here are a few basic definitions you should know and then we will discuss how you can figure out your stock allocation:
- Value stocks
A value mutual fund’s objective is to identify and invest in a variety of undervalued stocks, with the goal of producing market-beating returns over time.
- Growth Stocks
A growth fund’s objective is to identify and invest in the best growth stocks. Generally speaking, growth investing represents a higher level of risk than value investing.
- Index Fund
An index fund is a fund that tracks an underlying index. An index fund simply buys all of the companies in the index in order to match its performance.
- International Fund
An international fund is a fund that invests in companies based outside of the U.S.
- Global Fund
A global fund is a fund that invests in stocks from markets all around the world, including the United States.
In the long term, returns on equities are better than what investors have gotten from bonds and other investment assets. In the short run, however, volatility is higher. Being able to handle the wild swings in value in stocks is critical in order to avoid losses that can eat into your short-term investing performance.
Shelton Capital has prepared a video on stock funds as part of its 401(k) educational library. Check out Shelton Capital’s library of 401(k) Educational Videos to help you make good choices and stay on a good retirement track.