How to Diversify 401k Investments

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While many companies give their employees the opportunity to funnel 401k money into company stock, it's a good idea to diversify any investments you're making using your 401k rather than putting all your eggs in one basket. Every solid personal finance plan includes diverse investments across a variety of industries and investment types.

Things You'll Need

  • Financial advisor (recommended)
  • 401k plan
  • Acquire a copy of your 401k plan's Summary Plan Description (SPD). Here, the terms under which you can access 401k funds will be explicitly laid out. The SPD will also contain information on the terms and conditions under which you can use 401k money to invest in company stock, if your company allows such a practice.

  • Buy into company stock using your 401k money, if possible. Certain plans may include provisions under which you can then liquidate your shares in the company to reinvest in diversified investments. However, it is best to use this strategy only in a situation where the company's stock rose in value after you invested your 401k money in it.

  • Sell off the shares you bought in your company using your 401k money. You will then be left with capital to reinvest elsewhere. Among the many options available to an investor looking to diversify are stocks, bonds (corporate and government), money market funds, precious metals, currencies and other securities products, such as derivatives.

  • Remember that many 401k plans permit the account holder to be the sole director of any investments made using the money. Depending on the terms and conditions set forth in your SPD, you may be free to pursue other investment opportunities with your 401k without having to invest in company stock first. However, you should keep in mind that gaining direct access to your 401k funds is costly and can generally only be accomplished in times of financial hardship--when investing will be the last thing on your mind.

  • Work with your financial advisor to diversify your investment plan, bearing in mind that you are gambling your future by sinking your 401k money into investments. Investments that are 100 percent foolproof and risk-free do not exist.

Tips & Warnings

  • Sign up for investment diversification courses to educate yourself on building a safer investment portfolio. Many employers offer education programs, if a 401k investment program is in place as part of the company's financial policy.
  • While many employers offer buffers to employees who invest in company stock using their 401k in the event the stock declines, keep in mind that your company may not be liable if market forces result in capital losses out of your 401k.
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