If you are among the millions of Americans who contribute to a 401(k) plan, you receive a quarterly account statement composed of dull, incomprehensible financial prose. However, you want to maximize your contributions—so you’ll need to understand the types of investments offered in these investments.
Learn more about 401(k)s, which are best suited for you, and how to manage the account going forward to maximize your returns.
- 401(k) plans typically offer mutual funds that range from conservative to aggressive.
- Before choosing, consider your risk tolerance, age, and the amount you’ll need to retire.
- Avoid funds with high fees.
- Be sure to diversify your investments to mitigate risk, although many funds are already diversified.
- At a minimum, contribute enough to maximize your employer’s match.
- Once you have established a portfolio, monitor its performance and rebalance it when necessary.
Fund Types Offered in 401(k)s
Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities.
Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate. All of the major financial firms use similar wording. Here is a list of the types of fund strategies you might find:
- Conservative Fund: A conservative fund avoids risk, sticking with high-quality bonds and other safe investments. Your money will grow slowly and predictably, and you would rarely lose the money you put in, short of a global catastrophe.
- Value Fund: A value fund is in the middle of the risk range and invests primarily in solid, stable companies that are undervalued. These undervalued corporations usually pay dividends, which are typically quarterly cash payments but are expected to