From
Your Perspective:
Managing your 401(k) portfolio
Diversifying your
401(k)
In addition to choosing — and potentially
revising — your
asset
allocation
as your risk tolerance
or financial situation change, it’s important to keep your
portfolio
diversified.
When you diversify, you choose between
different
subclasses
of investments within each
asset
class. Each subclass is similar
to other investments in its class, but also has some distinctive
characteristics. For example, the stock of large and small
companies are both
equity
investments. But the two tend to increase in
value at different rates, expose you to different
levels of investment risk, and prosper under different economic
circumstances.
So, let’s say your
401(k)
offers both
small-cap
and
large-cap
stock funds. If you own each type of fund, you’re positioned
to benefit from a strong return on at least a portion of your
portfolio, no matter which fund is providing the stronger performance
at any given time. That’s the whole point of diversification:
It means you’re investing to protect your portfolio against
major losses that could result from a drop in value of a single
investment or market
sector.
While
a fund’s name must indicate how it invests,
don’t take it strictly at face value. Look at
the fund’s prospectus for its objective, and
to review the types of investments the fund is making.
You may find that a fund that describes itself as
a small-company fund actually has substantial investments
in medium-sized companies or in cash. That could mean
you’re not as diversified as you’d like
to be, and may need to look at other alternatives.
