| Your 401k will be invested primarily in mutual | | | | Mutual funds come in a wide variety of flavors. |
| funds. Some 401k plans allow you to invest in | | | | Many specialize in stocks, and even then, they |
| individual stocks, but I don't recommend that. | | | | further specialize into American stocks or foreign |
| You'll do better sticking with a few mutual funds. | | | | stocks, blue chips or small stocks, high fliers or |
| In this article, I explain just what a mutual fund is, | | | | conservative stocks. Some mutual funds invest in |
| and what kind of flavors they come in. | | | | stocks of only one industry. |
| A mutual fund pools the money from many | | | | Other mutual funds invest in bonds, again with |
| different investors. A professional investment | | | | subspecialties for different types of bonds. There |
| manager picks the stocks or bonds in which the | | | | are also mutual funds investing in real estate |
| fund invests. It's good for investors because it is | | | | investment trusts (REITs), providing you a way |
| well diversified. It is cost effective because the | | | | to invest in real estate through a mutual fund, and |
| fund's expenses are spread among many | | | | thus through your 401k. |
| different investors. | | | | Mutual funds also differ from one another in |
| Imagine you and a few of your neighbors all | | | | whether they are "actively managed" or "indexed." |
| pooling their money and asking another neighbor, | | | | Active management means that the fund |
| Manny, to invest the money. Manny would keep | | | | manager tries to pick the best stocks or bonds |
| track of how much each person put into the pool | | | | to buy. Indexing, in contrast, is an approach |
| of money. Then Manny would use the money to | | | | designed to mimic the overall market. The |
| buy stocks or bonds. You would all share in the | | | | manager of an index fund buys a little bit of |
| gains or losses of the pool. You'd all pay Manny a | | | | everything. |
| fee for his efforts. This is a little mutual fund. The | | | | Deciding to invest in a mutual fund is your first |
| big funds work just the same way, but with | | | | step. Now you have to figure out which funds to |
| many layers of government regulation, auditing, | | | | buy. That's a subject for another article. |
| and sophisticated management. | | | | |