There are several different assets you can choose to invest in within your 401K. How do you know which to choose? There is a range of different risks and rewards associated with each asset. Today, the 401K brothers add some light to the different investments and their risk.
Show Notes:
- :30 - Why are there so many different asset classes to choose from in your 401k
- :40 - Some people have a greater appetite for risk especially. We also must keep mind that people from their 20´s to 60´s are investing in these asset classes.
- 1:26 - The different types of assets
- 1: 30 - Cash - you know what you will get. However, cash or cash equivalents do not outpace inflation. It is a safe haven over a short period of time.
- 2:56 - Bond funds - You look at this like an I owe you. You are lending the company your money. A little more risk than cash however you have a little bit more return.
- 4:20 - Large- cap Stock - When you buy a stock, you are buying ownership of that company. Large cap are like Exxon, McDonalds, Walmart, etc.
- 5:25 - Mid-cap - Funds that are smaller than the large cap. These are maturing companies. They are not mature like Exxons and Walmarts. They carry a little more risk.
- 6:27 - Small- cap - Companies that are valued at less than $2 B. There is more uncertainty in this class.
- 7:30 - International Funds - These are companies outside of the US. You have no idea about the politics, it is a different currency, and you have no say in either of these things.
- 8:30 - It is good to understand the risk and reward scale to understand what you are comfortable with.
- 9:22 - If you have a shorter time window to retirement, you need to understand that you will have a smaller tolerance for risk.
- 10:00 - Specialty funds and Balanced funds - Specialty funds are geared towards a certain sector ie healthcare, energy, or real estate fund. Balanced funds are based on age appropriate or risk associated funds. It is a blended balance depending on what you select.
3 Key Points:
- There are several different classes within a 401k plan.
- Each asset class varies on the risk scale.
- The different classes of assets on a scale from less risk to more risk are cash, Bond, Large caps, Mid-cap, Small-cap, International funds.
Tweetable Quotes:
- “Cash or Cash equivalents do not outpace inflation.” –Bill.
- “More risk and more reward.” –Bill.
- “It is important to know the risk rewards scales because within a 401k plan you are taking on risk and it depends on what you are comfortable with. ” –Bill.
Resources Mentioned:
