Choosing the Right Mutual Funds for Your 401(k) Account

Choosing the right mutual funds for your 401(k) is vitally important to the long term growth of your investments. For many investors, their employer sponsored 401(k) plan may be their primary, or only form of investment and retirement planning. This makes the selection of the right mutual funds even more critical, not only as you near retirement age, but also in the beginning of your investment life.

Balance is the key when selecting which funds to include in your portfolio. You want to make sure that you have a good mixture of funds that expose you to all market sectors (healthcare, energy, real estate, technology), stock categories (growth, value, income, international), and include some bonds as well. Proper diversification will help your portfolio weather market fluctuations and will assist toward generating higher returns. Also make sure that you have some exposure to small and medium capitalization companies (known as "small cap" and "mid cap" which refers to their market capitalization) in addition to the large "Blue Chip" stocks.

The length of time until your retirement will also dictate the mixture of funds that you choose. If you are 30 years old, your 401(k) should be heavily weighted towards stocks, with only a minimal exposure to bonds. If you are 55 and near retirement, your 401(k) should contain a higher percentage of bonds as this will preserve your capital better and have less volatility as you near retirement. Essentially the more time that you have left until retirement, the more you want to weight your 401(k) account toward equities.

Get information from your Human Resources Administrator, or the individual in your company responsible for administering the 401(k) plan. They should be able to provide you with a wealth of materials, including a prospectus for each mutual fund offered. Read the information thoroughly and inquire if your company offers free yearly meetings with a financial professional, or an educational session about investing in your 401(k). There should be a multitude of resources available to you, all you need to do is ask.

As you read through the prospectus, review the past performance and individual stocks owned by each fund. Select between two and five funds (my personal recommendation), being careful not to select multiple funds that specialize in a similar type of investment (Growth, International, Technology sector, etc). Look at the performance of the fund and remember that while past rates of return are no guarantee of future performance, well run mutual funds with a history of solid returns have a good chance of doing so again in the future.

Many 401(k) plans also now offer a single "Life Stage" fund that automatically diversifies your portfolio and readjusts the balance between stocks and bonds based on your risk preference and time window until retirement. The funds are quite popular because they require little of your attention beyond the initial set up. Inquire if your company offers these funds through their 401(k) program.

There are many resources of the web to find information about mutual funds: www.fidelity.com, www.morningstar.com/, www.schwab.com, etc. Do your homework and familiarize yourself with the terminology of mutual funds and investing, you'll become a wiser investor for your efforts. And above all else, participate in your 401(k) plan, especially if your employer offers to match a portion of the funds that you contribute to the plan. Remember that your retirement and your future are in your hands.