| 401k Plans and Stocks: The Importance of Diversification |
401k Plans and Stocks: The Importance of Diversification
If you have a 401k plan, chances are your money is invested in stocks. Unless nearing retirement, investment experts recommended dabbling in the stock market. For those who are able to wait and survive the market's ups and downs, the stock market is a great way to invest, save, and make money for retirement.
If you just created a 401k account or if you are now realizing the importance of getting the most from your 401k, you may wonder how to increase profits and reduce losses. When the stock market is involved, there is one word you need to know; diversification. Diversification is key to maximizing your savings and reducing losses.
Most importantly, never invest too much money in your company stock. For most, company stock seems like the best choice. You work for the company, so why not support it by being a stockholder. This is a good theory, but it can backfire. What if your company collapses and goes under? You not only lose money from your stock, but you lose your job too. Don't suffer a double hit.
Always review your employer contributions. Many employers contribute to their employees' 401k plans. This usually involves matching a percentage of employee contributions. Some employer contributions come with restrictions. For example, the money may only be used for company stock. Your hands are tied in this aspect, but use the rules and restrictions to diversify your own contributions. For instance, if your employer contributions buy you stock in your company, use your own money to invest in others.
Always think outside of the box. For example, in 2007 and 2008, the auto industry took a significant hit. Automakers were left to layoff workers, close plants, and ask for government assistance. There were signs these companies were starting to go under. If you had stock in the automakers, you may have had an opportunity to get out before the stocks dipped too low. With that said, it wasn't just the auto makers that saw a decrease in stock, most wholesale auto parts suppliers, auto stores, and car dealerships saw a decrease too. This is because they are all directly related to each other. When diversifying your stocks, always consider this relation. Never invest only in stock related to the auto industry and so forth. Diversify your portfolio.
One of the best ways to diversify is to consider the economy. It always has its ups and downs. For example, when the economy is good, consumers spend more money. When it is bad, they spend less. This is evident with restaurants. Domino's Pizza shares were around $32.25 in April 2007. In January 2009, they are now about $6.13 a share. Now, the economy is bad. Consumers are watching and limiting their purchases. For years, McDonald's shares were consistently below $45 a share. In 2007, they started to increase. In January 2009, shares were worth about $60.07 each. If you invest in retail stores or restaurants, be sure to have a mixture of high end and discount companies. That way you are protected if the market changes direction.
The above mentioned tips focused on diversification for 401k stocks. It is also a good idea to diversify in other aspects. Don't invest all your money in the stock market. Every so often, the market experiences twists and turns. Don't get caught in the rough patch when ready to retire. As you near retirement, start making the switch to bonds. They do have a smaller payoff, but the risks are much less. If in your early 20s or 30s, diversify and create your portfolio with a mixture of stocks and bonds.
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