The First Step
by Maria Crawford Scott
Lets suppose you are relatively new to your 401(k) plan. And like many new investors, youve started to read through investing guides that stress the importance of asset allocationnot only among the major categories of stocks and fixed-income investments, but also within categories such as large stocks, small stocks and international.
The Question Is:
How can you possibly invest in all of those categories with your first contribution?
The Answer: You Cant.
When you are starting out in any investment program, it simply isnt possible to achieve instant diversification among all of the asset categories.
Where, Then, Do You Start?
First, try to develop an overall investment strategy that you are aiming for, even if you cant implement it immediately.
Second, for your initial investment select either a balanced fund, or combine a broad-based stock index fund with a U.S. government bond fund, and build from there.
The Balanced Fund Approach
Balanced funds, also known as asset allocation funds, invest relatively fixed percentage amounts in the major asset categoriesstocks and bonds. If you take this approach, you have less control over your asset allocation decisionyou are locked in to the percentage mix selected by the fund. Make sure, if you use this approach, that the fund you select matches your risk/return investor profile.
Additional investments can be made until you feel you have saved enough to start branching out into more specific market segments.
Most investors eventually will want to switch out of a balanced fund, gaining control of their own allocation decisions using funds targeted for each market segment.
The Combined Stock Index and Government Bond Fund Approach
Many investors who are just starting an investment program have a very long-term time frame possibly over 30 yearsand can afford to take on substantial stock market risk. If you take this approach, you determine your own exposure to the stock market by deciding how much you want to put in the stock index fund versus the government bond fund. The broad-based stock index fund combined with the U.S. government bond fund serves as the core of your overall portfolio as you start to build toward your investment plan. You can simply add more funds in other market segments as your retirement funds allow.
Whichever route you choose, by participating in the plan you are taking an important step that will set you in the right direction toward your retirement goal.