Most likely, the money from your 401k plan is invested in stocks. That is what most experts recommend if you are not yet near your retirement. And it probably is a good way to invest, altough you have to stay calm and must not panic when you see the market going up and down.
Of course when you are the proud owner of a 401k account, you want to get the most out of it. And you probably also want to increase your profits. The basic rule when investing in the stock market is to diversify at all times. It is the only way to reduce potential losses and maximize savings.
This rule of diversification also counts whenever you want to invest in the company you are working for. It is a noble idea to support them by participating but you do not need to be too loyal either. Suppose you have invested all your savings into your company stocks and they collapse. Then you are hit with a double loss. You lost a lot of money and your job.
Again the rule of diversification applies to your 401k plan. When you work for a company that automatically enrolls their employees in a 401k program, then make sure to verify your employer contributions. Both you and your employer can be contributors. Sometimes your employer is investing only in company stock. If that is the case then certainly diversify your own contributions. If for example your employer only buys stock in their company then you can play safe by investing your contributions in other companies.
Remember that in 2007 and 2008 the auto industry started to layoff workers and close plants. These were signs that automakers had a bad time to face. And we all know how the situation is evolving in 2009. Suppose you had invested all your money in these companies and even related companies like auto stores, auto parts suppliers, etc. Altough the entire stock market is hit by the crisis, it is still wise to diversify.
We have been talking until now about diversification of your 401k stocks. But that is not the only way you can minimize your risks. Besides the stock market, there are also bonds. They fluctuate too but when they reach due date, you get back the money you invested. Certainly if you near retirement, you may consider to switch to bonds. In fact, the best thing to do is to create a portfolio that is a mixture of bonds and stocks from day 1 of your enrollment in any retirement plan.
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