How to Invest Money in Your IRA or 401k Retirement Account

Money Girl answers listener questions and explains how to invest money in your retirement account, so you take the right amount of risk and reach your financial goals.

Laura Adams, MBA
8-minute read
Episode #399

You might allocate your stock percentage to a variety of stock funds or put it all into one stock fund. The remaining amount would be in other asset classes such as bonds and cash, which I’ll cover.

To grow your money without taking unnecessary risk, it’s important to diversify your investments across broad asset categories, such as stocks, bonds, and cash, in a ratio that’s right for you.

Free Resource: Retirement Account Comparison Chart (PDF download)

To grow your money without taking unnecessary risk, it’s important to diversify your investments across broad asset categories, such as stocks, bonds, and cash, in a ratio that’s right for you.

Here are 5 types of funds that might be available on your investment menu:

Fund Type #1: Stock Funds

Stock funds typically make up the majority of your investment choices. They’re made up of a variety of individual stocks, which are ownership shares in different companies. Stock funds might focus exclusively on international, domestic, large, small, or growing companies, for instance.

Additionally, You might see the terms large cap, mid cap, and small cap in the names of stock funds. Cap is short for market capitalization, which is the value of a company’s stock shares. So a large cap fund means that it invests in the big boys, like Apple, General Electric, and Walmart. 

Fund Type #2: Target Date or Retirement Funds

More investment menus are including target date or retirement funds, which are highly diversified, one-size-fits-all solutions. You’ll know them because they include a year in their name, such as Retirement 2030 Fund or Retirement 2055 Fund.

The date in the name is supposed to match the date you want to retire. So figure out the year when you anticipate retiring, such as the year you'll be 65 years old, and choose the fund with the closest target date.

Target date funds include a mix of asset classes, such as stocks, bonds, and cash, so you only need to own one of them. What’s unique is that they automatically rebalance the ratio of risky and conservative investments over time, so you become less aggressive as you approach your desired retirement date.

In other words, the right amount of stocks is already baked into the product and decreases slowly as you get closer to retirement. That makes choosing a target date fund a really easy way to invest, especially for beginners.

So if Brianna has a target date fund on her 401k menu, that’s what I’d recommend for her to get started. You can always change your investment choices later on if you want to tailor them.

Fund Type #3: Balanced or Blended Funds

Balanced or blended funds are similar to target date funds in that they include a mix of stocks and bonds. However, the mix remains fixed and never changes or rebalances over time.

As I previously mentioned, if you’re a young or middle-aged investor, it’s likely that stocks should make up a majority of your retirement portfolio. Therefore, if a balanced fund is made up of 50% stocks and 50% bonds, it may be too conservative for you and wouldn’t grow your money fast enough.

Or the split could also be something like 60% stocks and 40% bonds. So, look carefully at the ratio of assets to make sure it’s right for your age and risk tolerance.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.