How 401 k Plans Work

Doing Your Homework

Don't blindly choose stocks without knowing anything about them. Do a little homework. Your plan administrator should have information available for you about each fund. These are often available online as well. Read the prospectus of each fund and select the ones that you find fit best with your own philosophies and ideas.

To build a diversified portfolio of funds, one strategy is to select 25 percent of funds from small-cap stocks, 25 percent from mid-cap stocks, 25 percent from large-cap stocks, and 25 percent from international stocks. If your 401(k) plan doesn't offer all of those options, then you can fill in the missing ones with an IRA. The idea is to spread out your investments to create a diverse portfolio. This helps balance out your risk because when you have one fund that is up, you'll probably have another fund that is down. The large-cap funds are less risky, but the small-cap funds often have more growth potential.

In order to keep this balance, you also need to remember to check back from time to time and make sure you still have the same percentages for each type of fund. If companies within a fund are doing extremely well, they can often be pushed to another level, in which case your investments become off-balance.