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If the economic recession and bear market a few years back prompted you to move your assets into more conservative investments such as bonds or cash equivalents, and you haven't made adjustments since, it may be time to reconsider your investment strategy.
Retirement plans typically include investment choices from three major categories: Equities (stocks or stock funds), bonds, and cash equivalents. Stock funds, which are the type of equities usually found in 401(k) plans, offer the greatest potential returns of the major asset classes, but also carry the greatest investment risk.
The growth potential of equity funds
A diversified asset allocation (mix of investments) that includes equity funds could help you balance investment risk with growth potential. Directing a portion of your assets to equities, balanced by bond and cash equivalent investments, can help reduce investment risk overall, and potentially achieve the growth you're aiming for.1
Directing a portion of your assets to equities, balanced by bond and cash equivalent investments, can help reduce investment risk overall, and potentially achieve the growth you're aiming for.
Choosing when to add
equity funds to your portfolio
If you reduced your allocation to stocks during the market downturn, you may be wondering whether it's time to increase that exposure to give your portfolio more potential for growth. As always, you'll want an allocation appropriate for your goals, time horizon and tolerance for investment risk. And you'll want a diversified strategy that balances equities with bond funds and cash equivalents.
Diversify among equity funds, too
You should also consider diversifying among equity funds. Your retirement plan offers a variety of different equity funds, which may include "value funds," "growth funds," index funds, and funds that invest in small, middle or large capitalization stocks. The term "capitalization" simply refers to the market value of a company's outstanding shares, which is calculated by multiplying the stock price by the number of shares the company has issued. Most plans offer international or global funds as well. Each type comes with its own risks and potential for gains. Many experts agree that a well-diversified portfolio will include several different types of stock funds, in addition to bond funds and cash equivalents.
Learn more and take action
If your 401(k) plan is with Merrill Lynch:
You can use Benefits OnLine to:
- Learn about the investment choices available in your plan. Go to 401(k)>Investments.
- Change the way future contributions will be invested. Go to 401(k)>Current Elections>Investment Direction.
- Transfer assets between funds. Go to 401(k)>Fund Transfer.