Basics of Investing

Archive for August, 2006

Question: What kind of 401k fund is safest, and yields most profit?

Fidelity is the investment company my company uses for their 401k plans. The Fidelity website I visited just confused me. I don’t understand all that mumbo-jumbo. I really don’t know exactly how 401k works. I need to be able to make an informed decision soon, or I have to forfeit starting a 401k account for this fiscal year. I am interrested in investing in something that is going to yield a fair profit steadily over a long period of time. Also, I don’t want to risk losing the money I put into this account, or worse, lose more than what I put in! Is there a sweet compromise between risk and profit? I need some answers in layman’s terms, as I am in unfamiliar territory.

Answer: Those two questions have opposite answers. Expected return on a portfolio is directly related to risk. You can have a safe portfolio with a small average return or a risky portfolio with a larger average return.

If you are young, don’t worry too much about safety. There will be lots of good years and a few bad years before you retire. The returns in the good years will outweigh the returns in the bad years, and in the long run you should outperform the safer portfolio.

You should probably put your money in a well diversified fund that mimics a broad stock market nidex — like the S&P 500. If you want higher returns, put part of it into a growth fund. If you want more safety, but part of it into a short to medium term bond fund — but don’t expect big returns n that portion of your portfolio.

Fidelity Investments Green Line Spot 5