Picking Funds in a 401(K)

You probably have some broadly titled funds in your 401(k). Titles like Small Cap Index or Equity Index or Bond Fund or Balanced Fund and you aren’t exactly sure where to put your money and in what percentages. Fret not, I’ll break it down into easier to understand categories and you can go research which funds fit which strategy.

How you invest in your 401(k) should depend on your age (and your aversion to risk). Investments break down into stocks or bonds, domestic or international. Within stocks you have small cap and blue chip stocks. Stocks are riskier than bonds, international is riskier than domestic, and small cap is riskier than blue chips.

Basically, what you want to think about is that your investment portfolio is like a slider with “risky” on one end and “conservative on the other. As you age, you want to slip that slider from risky towards conservative because you don’t want those hard bumps in the road to derail your trip to a comfortable retirement. You trade off the crazy gains in return for not having the crazy losses.

Now, taking the stocks/bonds, domestic/international, and small cap/large cap spectrums… the following are risky: Stocks, International, Small Cap. The following are conservative: Bonds, Domestic, and Large Cap. Now adjust your holdings so you have the appropriate mix and you’re all set.  These are generalizations and an oversimplification of the element of risk but you get the general idea.

Now… what is the appropriate mix? That’s for another day to discuss but check out the various target-date retirement funds if you want a better idea of what the experts say.