Retirement plan decisions made easy
Drill Down: Investment Definitions
The return on an investment is what you gain. It’s usually expressed as a percentage such as five percent or ten percent or twenty percent. The definition of risk is slightly more complicated. It’s related to your potential loss, but there’s a better way to describe it: the variance of returns. As a general rule, investments with higher expected returns entail higher risk.
Before going too far, we need some basic definitions for the different investments we will be talking about.
- Stocks are shares of companies. Each share represents one tiny slice of the total ownership of the company. If the company has 100 million shares outstanding, and you own one of these shares, you own one one-hundred-millionth of the entire business. Wow! Don’t you feel rich?
- Bonds are debts. A company or government borrows money by selling bonds. Each bond promises to pay interest in addition to repaying the original purchase price.
- Mutual Funds are boxes that can hold stocks or bonds.
- Money Market Mutual Funds are mutual funds that own very short-term debts. The per-share value of the fund hardly ever changes, and all return is from income.
- Your portfolio is what we call all of your investments, across all the different accounts in which you own them.
These are your primary investment options in a 401k. They come in different flavors and with a dizzying array of names.
If you go outside of your 401k, there are lots more choices. A few 401k plans offer access to many different investments through a stockbroker. I recommend you stick to a few basic mutual funds.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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