Building your 401(k) Portfolio

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.

Market Capitalization Stock funds are usually categorized based on the size of the companies they invest in. This doesn't mean the size of the company exactly, but rather the stock market value. This is determined by multiplying the number of outstanding shares by the share price. This is called market capitalization, or cap size. Small-cap funds typically invest in companies that have a market value less than $1 billion. Small-cap funds can provide high investment returns but are also considered to be a little risky. Mid-cap funds are usually made up of companies valued in the $1 billion to $8 billion range. They'll have some in the lower end that are likely to have higher growth but at the same time add some risk. Large-cap funds invest in companies with market values that are more than $8 billion. Large caps often follow the index funds and invest in all of the companies. Large-cap funds are less risky but typically produce lower returns.

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.