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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