401(k) plans offer more stock funds, in more varieties, than any other type of fund. In fact, 56 percent of 401(k) assets nationwide are invested in stocks and stock funds. That’s probably because stocks and the funds that invest in them have, as a group, historically outperformed other types of investments over the long term—though no stock fund guarantees a positive return. In the short term, however, stock returns overall can be up or down, and most funds lose value in a falling market.
Typically, 401(k) plans offer a spectrum of stock funds that ranges from relatively conservative funds, which pose the least risk to your principal, to moderately or highly risky funds. Conservative funds, such as growth and income funds or equity income funds, concentrate on well-established companies that pay regular dividends. The funds’ goal is steady if sometimes modest growth in value, regular dividend income and limited risk from major losses resulting from business failure.
Aggressive funds, on the other hand, tend to invest in younger companies that managers believe have the potential to be much more valuable in the future than they are today. But these companies also have a greater chance of failing. Investing in them can put your capital at risk.
Be prepared, though. Most of the time, the name of the fund doesn’t indicate the level of risk it poses. That’s one of the factors you must investigate as part of choosing funds.
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