New participants to 401k plans must quickly learn about proper 401k allocation. The reason is that so much of the success of their retirement can rest on how well their investment decisions are in their 401k plan. Since participants can normally place their funds into several different assets (mutual funds, stocks, bonds, equities, etc.), it is important to know how each one can impact your plan and the benefits of diversification.
Although each 401k plan will have different investment options depending on the specific plan. Generally, you will find that most are with big investment companies like Fidelity where they give you a broad selection of different types of mutual funds like Growth, International, Diversified, Emerging Markets, Small Cap stocks, Mid Cap stocks, Index Funds, Short term investments, etc. The typical 401k plan offered 18 fund choices in 2008.
The conventional wisdom of investing decisions is to put a greater emphasis on stock mutual funds when you are younger and shift more of an emphasis over to bond funds and money market funds as you get older. The reasoning behind this is that when you are younger you can take more risks and should naturally go for funds that offer higher returns. However, as you get older, you should be more concerned about protecting your 401k funds and keeping them in mutual funds and investments that are more likely to offer smaller returns but are safer. Still, you also must recognize the market fluctuations that can occur during recessions like now where all investors should shift their funds to safer investment options like bonds and cash equivalents.
Another aspect to consider is the need for diversification. This is important to help address temporary drops in the market. This diversification should generally be spread out among the three main classes: stocks, bonds, and cash. However, it should also look into the specific variations within each class. You should look at adjusting your holdings into the stronger performing groups in each sector. For example, this may mean having more holdings in small-cap stocks as opposed to large-cap stocks at a certain point in time. Also, you may move funds into an international fund to provide more support. Finally, you may find that your 401k investing options are too limited and need to support your account by making other investment options outside the plan to support. One popular case among investors is to use an IRA account to access foreign investment options that are not available with their 401k. This is designed to give them further diversification and can sometimes be used as an area of growth.
As a new 401k plan participant, you will do well to learn about all the different 401k allocation investment options. Although investment strategies will vary depending on which financial advisor you talk to, the decision on where to put your money will ultimately rest with you. Be sure you are getting sound advice that supports your understanding of your options. These decisions are too important to not take the time to learn how to invest your money wisely.