I wanted to present you with one more gem from my friend Nancy
Zambell. Follow the advice below and you will be well on your way
to making educated decisions in your 401(k).
The first investments that many investors purchase are the mutual
funds that are offered through an employer's 401(k) plan. Over time
for many investors these accounts add up to the majority of their
Yet - through my years of helping friends, families and associates
make sense out of these programs - I have discovered that many
people do not have a good understanding (and sometimes, none at
all!) of just what they are being offered. Instead, they just check
off boxes, deposit their money every pay day and hope for the best.
That is not exactly what I would call a smart investment plan. Yet,
who can blame the average employee/401k investor? Their employers'
present them with a 2-inch stack of papers that may include a
prospectus for each fund offered, pie charts illustrating different
combinations of funds, and a bunch of numbers on fund returns and
costs. If the employees are lucky, they will attend a 15-minute
meeting where some fund administrator waxes eloquently about the
tremendous opportunities of joining this 401(k) , but will offer
little of value to steer the employees into the best funds for
their personal situations. And then.they expect their employees to
fill out the application, choose their investments and return the
paperwork in a day or two!
It's a pretty bad introduction to investing and it's no surprise
that talking about 401(k) plans causes an immediate
eye-glazing-over for most folks. But there isn't really any reason
for the confusion. All it takes is a little knowledge and some
elbow grease, and you will never be scared of opening up that
401(k) package again.
Here are the major mutual fund categories
The most popular are
. They are just what they sound like: Funds that invest in stocks.
They are categorized as follows:
Additionally, each of these categories may be further divided
concentrate on one particular sector of the economy. There are
sector funds for just about any industry or sub-sector of any
industry. Oil, energy, financial, pharmaceutical, semiconductors,
hardware, technology, software - you name it - there's probably a
sector fund for it. While the concentration in one industry can
bring fabulous rewards, it can also cause significant losses,
making these funds more appropriate for investors who can handle
, which invest in fixed-income securities, are also very popular,
especially for investors who are more conservative with their
money. These funds are available in short-term (1 - 3.5 years) ,
long-term (>10 years) or intermediate-term (3.5 - 10 years). And
bond funds come in a few varieties also:
Government and government agency: The 'safest' (in terms of
recouping your principal), but generally pay the least amount
Municipal: Bonds issued by state and local governments and
their agencies, in the form of general or revenue issues. Tend
to be fairly safe, but investors should pay attention to their
bond ratings before investing. For easy access to the major
bond rating firms rankings, go to
Corporate: Bonds issued by corporations and tend to pay
higher interest than governments or munis. May be safe or
risky; ratings should be checked.
High-yield: Pay higher returns, but also tend to be much
riskier than investing in regular corporate, government or
municipal bonds. Investors should pay heed to their
may include a combination of equities and fixed income investments,
'balancing' out risk, but also reducing returns.
offer investors the opportunity to own stocks and bonds of
companies outside the US. Selections include:
may also encompass US stocks and bonds. Of all the foreign
investments, they tend to be some of the safest, since many contain
have no US investments, and they run the gamut from safe to risky.
will generally invest in one specific country or region and can be
Emerging market funds
invest in undeveloped regions of the world. They can offer
tremendous growth, but also significant risk.
Money market funds
tend to be very safe since they invest in very short-term
securities, but also offer fairly low returns.
Ok, now you have a handle on the major categories of funds. Your
401(k) plan will most likely offer a combination of different types
of funds, fused into several investment strategies, such as
conservative, growth, value, blended, income, or balanced. To
prepare for your selection, you will need to consider your time
frame for investing (i.e., how long before your retirement) and
then make a decision as to just how risk-averse you are in order to
determine the types of funds and strategies with which you would be
Once you have made those important determinations, you'll be ready
for the next step: Evaluating and comparing the available funds in
terms of returns, costs, turnover and management strategies.