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Introduction
401(k) Defined
401(k) Advantages
The Drawbacks
Investment Basics |
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Investment
Basics Here are
some basic investment concepts that are good to know before you invest in your 401(k).
What is Risk?
In investing, "risk" doesn't
really mean the risk that you're going to lose your investment. |
Risk is more accurately defined as
the amount that the investment's value fluctuates over time. "Risky" investments
go up and down more steeply than "safer" investments.
Risk and return have a direct relationship.
Usually, as an investment's potential return increases, its level of risk increases too.
Conversely, "safer" investments tend to have lower return potential.
How Long Will You Be
Investing?
The longer you can hold onto an investment,
the better off you'll probably be. A long time horizon enables you to afford to take more
risk with your investment and thus increase your return potential.
Diversification
Diversifying among several investments is
another way to reduce potential risk. It's important to build an appropriate mix of
investments so that your overall mix -- or portfolio -- of investments can achieve
maximum potential returns without exposure to more risk than you're comfortable taking.
Dollar Cost Averaging
Unless you have a large sum to invest, the
best way to put your money into the financial markets is systematic investing (or,
contributing the same amount at regular intervals). The net effect of this technique, dollar
cost averaging is that you will naturally buy more investments when their price is
relatively low. Since a 401(k) plan takes the same percentage out of every paycheck, it
does the systematic investing for you.
Why You Need a Plan
A comfortable retirement doesn't just
happen. To achieve the retirement of your dreams you simply have to have a plan.
Once you've determined your retirement needs, the next step is to develop an investment
plan to reach your goal.
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