401k Investment Basics

Here are some basic investment concepts that are good to know before you invest in your 401k.

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 401k 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.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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