Christopher Carosa over at Fiduciary News polled several prominent investment advisors about the basic investing concepts that are most important for 401(k) participants to understand. He came up with seven:
1. The real relationship between risk and return — that is, assuming more risk doesn’t mean you’ll see a higher return.
2. Diversification — spreading risk is a highly individualized responsibility.
3. Asset allocation — look beyond stocks vs. bonds, to suballocations within stock asset classes.
4. Time is on your side — but only if you take advantage of it. Too many young participants delay saving for retirement, mistakenly thinking they can catch up later.
5. Market timing — a losing game. Instead, choose a diversified portfolio you can stick with in any market environment.
6. Pay attention to fees that matter — know the cost structures of funds in the plan. While the cost of fees is a factor, cheaper is not always better.
7. Monitor and adjust as needed — if you choose to go the DIY route, you’re responsible for keeping track of performance and making a switch when a fund is no longer doing well.
Sound about right to you? Got another basic concept to add to the list? Share your thoughts in the comment box below.
