Picking Investments Primer
401K Investing Primer:
- Decide if you’re OK with a target date fund. Choose the target date fund with the year in it’s name that is closest to your estimated retirement age.
- If you want more risk… choose a target date fund with a year in the name that is higher (i.e. farther into the future).
- If you want less risk… choose a target date fund with a year in the name that is lower (i.e. nearer to today).
If you want to “play” around a little bit, you can select asset classes that you think might perform better over a set time frame:
- Equities (stocks)
- Small Cap
- Mid Cap
- Large Cap
- “Growth”
- “Value”
- “Blend”
- “International”
- Fixed income (bonds)
- Short Term
- Intermediate Term
- Long Term
- Cash and cash equivalents
- Cash, Money Markets, Treasury Bills, Commercial Paper, Certificates of Deposit
- Commodities
- Metals
- Energy
- Livestock and meat
- Agriculture
- Real estate
- Office & Retail = Commercial Real Estate
- Single Family & Multifamily = Residential Real Estate
- Industrial
- Hospitality
- Specialty (Hospitals, Farmland, etc.)
Within the major asset classes, the subclasses of assets sometimes don’t behave differently. For example, the stock market did well in 2020-2021, so ANY “equity” asset class did well. Regardless of which sub-class within the “Equity” asset class, just choosing any “equity” was fine.
Commodities have done poorly over a very long time, but that asset class does well with inflation, or is supposed to.
Fixed Income do well when there is deflation, and interest rates are falling (or are supposed to). Fixed income assets are also supposed to be fairly stable (i.e. not as volatile in price) since they represent debt that needs to be repaid, backed by collateral / creditworthiness.
Real Estate is its own thing and highly dependent on location, sentiment of people, population & demographic cycles, etc…
There are also “Thematic” asset classes such as:
- Infrastructure
- Can overlap with other asset classes
- Government, Education, Defense, Health Care
- Utilities, Natural Resources, Transportation, Telecomm, Logistics, Waste Management
- Seeks to invest in facilities, services, and installations considered essential to the functioning and economic productivity of a society
- ESG (Environmental Societal Governance)
- “Infrastructure” investing but with a focus on investing in companies with certain standards of behavior as it relates to ESG factors.
- Can also be applying ESG factors to every company, regardless of their importance within infrastructure.
Going deeper than this will require research you will have to do and experience. It is an entire game people fiercely compete in. If you’re interested, consult with a financial advisor or start researching these topics to learn. Remember, it’s a blood sport. The “Market” doesn’t care how long you’ve been doing it, what your positions are, or what your hopes, dreams, and goals are. If you prefer not to play this game, Jack Bogle built a great company called Vanguard that’s spawned a lot of similar companies & funds that have “index funds” and “target date funds” for you. Please refer to the first 3 items in the post. Remember, “investing” is easy: https://fellow401k.com/blog/how-to-invest/
