Investment
Advantages:
The Unique Strengths of 401(k) Investing
If your 401(k) plan is your first experience with
investing, you're in luck. The structure of a 401(k) will naturally steer you toward some
very good investment habits, such as:
Long-Term Investing. Once again, our
chorus: Keep your eye on the long-term goal. Market fluctuations are almost always
short-term events. With a 401(k) plan you're investing for retirement, which gives you a
long time horizon. It's true that any investor with long-term goals can take a
buy-and-hold strategy -- but a 401(k) plan gives you extra incentive to stay the course.
Diversification. A 401(k) plan paves the
way for a healthy amount of diversification in your investment plan, for a combination of
reasons -- the availability of mutual funds, the range of investment options, and built-in
investment limits.
Special Considerations. 401(k)
participants are normally spared the cost of loads, sales fees and many related expenses.
There is also an element of convenience: 401(k) money is taken right out of your paycheck,
records for all your mutual funds are consolidated in one regular statement and a host of
operational duties are done for you by the 401(k) provider.
Dollar Cost Averaging. By investing a
fixed amount at regular intervals, you will end up buying more shares at lower prices.
This is because a drop in price will allow you to purchase more shares with the same
amount of money. You'll then benefit more when share prices increase again -- because
you'll have more shares -- and you will avoid emotional buying or selling when the price
fluctuates. This is called dollar cost averaging, and it is generally agreed to be the
best approach for an investor without a large lump sum to invest. By deducting money from
your paycheck and investing it on a regular basis, a 401(k) plan makes dollar cost
averaging impossible to avoid.
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