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Investment Basics
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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