Stock Investing for a 401k

One option that you have in 401k investing is to put your money into stocks. While many 401k plans will not allow you to invest directly into the stock market, other plans will provide for this. If your plan allows ,, here are a few things for you to consider.

Why Stocks?

If you have the ability to invest in stocks with your account, you should definitely consider doing so. The stock market can provide you with fantastic growth for your retirement funds. Historically, the stock market has always increased in value over the long-term. Therefore, if you employ a long-term investment strategy in regards to your stock trading, you should be able to increase the value of your account. By investing directly into stocks, you will be able to potentially post higher gains that you would if you invested in mutual funds. Mutual funds are made up of many different stocks in most cases. This lowers the amount of return that you can get from this type of investment. However, with direct stock investment, you can bring in some substantial gains.

Dividend Stocks

Many investors that purchase stocks for their 401k plans choose to focus on dividend stocks. With this strategy, you will invest in larger companies that pay a regular dividend to their shareholders. When you are receiving a regular dividend from a company, it does not matter is much what the price of the stock is. You will be able to build your retirement funds through regular dividends. A great thing about utilizing dividends in a retirement account is that you do not have to pay taxes on them immediately. If you were to receive dividends outside of a retirement account, you would have to pay tax on them at your regular marginal tax rate. However, in your retirement account, you are free to reinvest the dividends and keep growing your portfolio without worrying about taxes.

Diversification

Since you are investing directly into the stock market, you need to do your best to diversify your holdings. You should not invest all of your retirement funds into a single stock. You never know when that company could file for bankruptcy and your entire retirement savings could be lost. Therefore, you need to try and invest in companies that are from completely different sectors of the market. This will help protect you from a downturn in a particular industry.

Buy and Hold

When investing in stocks for your 401k, you should most likely employ a buy and hold strategy. Many people like to regularly trade their stocks when managing a regular investment account. With this strategy, they will try to take advantage of small movements in the market and lock in profits. However, when you are talking about the long-term like saving for retirement, you should use a buy and hold strategy in most cases. This will eliminate transaction costs and help you benefit from capital appreciation in the companies that you invest in.

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