Your 401k will be invested primarily in mutual funds. Some 401k plans allow you to invest in individual stocks,
but I don't recommend that. You'll do better sticking with a few mutual funds. In this article, I explain
just what a mutual fund is, and what kind of flavors they come in.
A mutual fund pools the money from many different investors. A professional investment manager picks the
stocks or bonds in which the fund invests. It's good for investors because it is well diversified. It is
cost effective because the fund's expenses are spread among many different investors.
Imagine you and a few of your neighbors all pooling their money and asking another neighbor, Manny, to
invest the money. Manny would keep track of how much each person put into the pool of money. Then Manny
would use the money to buy stocks or bonds. You would all share in the gains or losses of the pool. You'd
all pay Manny a fee for his efforts. This is a little mutual fund. The big funds work just the same way,
but with many layers of government regulation, auditing, and sophisticated management.
Mutual funds come in a wide variety of flavors. Many specialize in stocks, and even then, they further
specialize into American stocks or foreign stocks, blue chips or small stocks, high fliers or conservative
stocks. Some mutual funds invest in stocks of only one industry.
Other mutual funds invest in bonds, again with subspecialties for different types of bonds. There are
also mutual funds investing in real estate investment trusts (REITs), providing you a way to invest in real
estate through a mutual fund, and thus through your 401k.
Mutual funds also differ from one another in whether they are "actively managed" or "indexed." Active management
means that the fund manager tries to pick the best stocks or bonds to buy. Indexing, in contrast, is an approach
designed to mimic the overall market. The manager of an index fund buys a little bit of everything.
Deciding to invest in a mutual fund is your first step. Now you have to figure out which funds to buy. That's
a subject for another article.
but I don't recommend that. You'll do better sticking with a few mutual funds. In this article, I explain
just what a mutual fund is, and what kind of flavors they come in.
A mutual fund pools the money from many different investors. A professional investment manager picks the
stocks or bonds in which the fund invests. It's good for investors because it is well diversified. It is
cost effective because the fund's expenses are spread among many different investors.
Imagine you and a few of your neighbors all pooling their money and asking another neighbor, Manny, to
invest the money. Manny would keep track of how much each person put into the pool of money. Then Manny
would use the money to buy stocks or bonds. You would all share in the gains or losses of the pool. You'd
all pay Manny a fee for his efforts. This is a little mutual fund. The big funds work just the same way,
but with many layers of government regulation, auditing, and sophisticated management.
Mutual funds come in a wide variety of flavors. Many specialize in stocks, and even then, they further
specialize into American stocks or foreign stocks, blue chips or small stocks, high fliers or conservative
stocks. Some mutual funds invest in stocks of only one industry.
Other mutual funds invest in bonds, again with subspecialties for different types of bonds. There are
also mutual funds investing in real estate investment trusts (REITs), providing you a way to invest in real
estate through a mutual fund, and thus through your 401k.
Mutual funds also differ from one another in whether they are "actively managed" or "indexed." Active management
means that the fund manager tries to pick the best stocks or bonds to buy. Indexing, in contrast, is an approach
designed to mimic the overall market. The manager of an index fund buys a little bit of everything.
Deciding to invest in a mutual fund is your first step. Now you have to figure out which funds to buy. That's
a subject for another article.
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