Balance market fluctuations by diversifying your savings.
Your company’s retirement plan allows you to select from a variety of mutual funds. These funds can generally be grouped into three broad investment categories: stocks, bonds and cash. Each of these investments carry different risk and reward characteristics.
In addition, there is another category of mutual funds called “asset allocation funds.” These investments are a type of fund of funds which allocate their assets among a number of mutual funds in order to seek a specific investment objective while potentially providing maximum diversification.
Over shorter periods of time, day to day, month to month, even year to year—stock prices and returns can fluctuate dramatically. However, with a long-term horizon of a at least 5 years, stocks and stock based mutual funds have historically offered investors wealth-building potential.
It may be tempting to put all of your retirement assets in investments that have recently provided the strongest returns. But historically, the financial markets have continuously fluctuated. So, chasing today’s best performing securities can be a losing proposition. That’s why you should consider investing in a combination of mutual funds that have different investment objectives or invest in different asset classes for your retirement portfolio. This strategy is called diversification.
Your goal should be to strike a balance of investments that can help you achieve your investment goals within your risk tolerance.
Diversification does not protect an investor from market risk and does not ensure a profit.
With your company’s retirement plan, you have the ability to change your investment options whenever you wish. But, you should use this feature with caution. It’s tempting to react to short-term market events and lose sight of your longer-term retirement goal. Because the stock market can fluctuate significantly, you could miss out on significant gains by trying to “time” the market. Missing even a few days of strong performance can significantly reduce your returns.