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401Kafe
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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