How to Diversify Stocks in Your 401k
If you have a 401k retirement savings plan, chances are you dabble in the stock market. Everyone, especially those with years before retirement, are encouraged to give stocks a shot. There is a good chance that it will be a big payoff in the end.
Although stocks are a good way to generate money for retirement, there are some risks involved. In 2008, the stock market and the entire American economy took a hit. Many Americans were helpless as they watched their retirement savings decrease. That is part of the risk. That is why those nearing retirement, such as within the next five years, should avoid risky investments and start making the switch to low-risk options, such as bonds.
With that said, if you are young or looking for a big payoff, now is the time to get started. To avoid losing your retirement savings, as some Americans did, proceed with caution. It is important to diversify your stocks. For example, also in 2007 and 2008, the auto history took a huge hit. They closed plants, reduced car production, laid off workers, and even asked the government for financial help. If most of your stocks were related to the auto industry, you lost a lot of money. If you diversified your stocks and had some from financial institutions, technology companies, and the food industry, your loss was less because you diversified your stocks.
So, how do you balance your stocks for diversification?
First, it is important to look at your contributions. You contribute money from your paycheck. Does your employer match those contributions? If so, they may have set rules in place. For example, they may only allow you to use their contributions for company stock. In these instances, your hands are tied. However, you should still be able to balance and diversify the money invested into the account by you, through the above mentioned payroll deductions.
Even if your employer does not require you to hold stock in the company, it may seem like a good idea. Yes, it is, but don’t rely solely on your company’s stock. This has lead to a lot of complications and money trouble in the past, like with Enron. Buy a few company stocks, but do not put your eggs all in one basket.
In terms of 401k plans, many companies have financial advisors on hand. Talk to one of these advisors. They can provide you with a lot of valuable information and give you the names of promising stocks. Although these individuals are experts in the field of money management and investing, do not take their word for it. If your financial advisor provides you with a list of suggested stocks, don’t agree to them right away. Return home and research first.
As for the research, there are a number of steps you can take. The internet, investing shows, and the news can give you insight into the world of stock and the companies available for investing. Perform a standard internet search or use the stock ticker your financial advisor provided you with. Look at the stock.
In 2008 and 2009, most stocks were low. This was due to the poor economy. They should recuperate soon, but it may take time. To you, this may look like a good opportunity. What could be better than buying cheap stock? Before making a decision, look at the long-term history. Before 2007, most companies on the stock market were in relatively good shape. If a company’s stock has held steady at $2 a share for the past five years, take it as a sign it won’t go much higher.
As previously stated, those whose 401k stocks relied on the auto industries in 2008 and 2009 saw a reduction in retirement savings. By diversifying your stocks, you take a lesser hit when trouble comes. So, find a wide range of companies to invest in. For example, opt for food, retail, auto, technology, and financial companies. In terms of 401k stocks, mixing it up is the best way to go.