Expert: Paul Henneman - 4/21/2008

Question
Hi,I've recently been offered the opportunity to invest in my company's 401K plan. They match at 50%. I'm going to start out slowly, at about 2% weekly. I am 21 years old.
I need to choose where I want my money to go and I have no clue!
Here are some of the options:
Blackrock money market
American Century STGC - conservative, moderate, aggressive
3rd avenue value fund
Janus Advisor growth and income fund
American century livestrong 2015, 2025,2035,2045
Fidelity advisor midcap
There are afew more but I don't want to take up too much time. any help you can give me would be greatly appreciated. I'm not looking to get rich - just to provide for retirement.
Thank you so much
Kaitlin


Answer
Kaitlin,
  Thank you for your question!
  Yes, you are certainly right to want to invest in your company's 401k plan for two reasons: the investments will be tax free, and as you point  out your company matches (so it is like free money!).  The earlier you start the better, as investment returns compound over time, the longer they have to work for you the better. At 21 years of age, you are at a huge advantage to most people who do not seriously begin investing until their 30's or 40's.
   Unfortunately I cannot really help tell you specifically which fund to invest in, that is a decision that every investor must make on their own. The problem is that every investor is different, some take larger risk in the short term in the hopes of larger returns, others are very conservative in their investments and seek things out that have little or no risk, but give up higher returns for this.  However, I can provide a few guidelines.
   The most generally accepted approach to your situation would be to diversify across conservative, moderate, and aggressive funds. As you note, for example, American Century has a product that fits each of these.  When you are younger, most would recommend a higher percentage of your overall investments go to more aggressive categories. Any risk you take can easily be overcome in time, meaning that if your investments have a bad year or two, there is plenty of time (decades) for the aggressive investments to pick back up and overcome any short term losses. After a few decades, and aggressive approach will generally have earned you significantly higher returns, on average.
     As you get older, this same school of thought would have you move more investments into the conservative category, since the time until you need the investments to retire would become increasingly less.
     All of the mutual funds in your list are reputable organizations. Spreading out your contributions among several of them is the way to go, depending on if you want to be more aggressive or conservative.
    If you would like to do more research on this, www.MorningStar.com is perhaps the most reputable online source for researching mutual funds. The book "Investing for Dummies" is also a great introduction to 401k plans and mutual funds, I strongly advise you pick this up and read through it. It is worthwhile to spend a few hours learning the basics, so that you can set yourself up for a financially successful investment program as you go through life in the next 40 years. Just a bit of attention, and you will do very well as you have a huge advantage at your age that should make use of.

I hope this helps! Please do not hesitate to follow up with me if I can offer any additional specifics on any of the above.

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com