So, you've got a 401k. Now what? Even if you leave the heavy lifting to the Brainiac's at Guided Choice, it's a good idea to know how investing works. And if you're the do-it-yourself type, you need to understand how to invest appropriately. Don't worry, we're not going to show you tons of math. All you need to know to get started is that there are three big types of investments called asset classes, stock, bonds, and cash. Stock is just ownership in a company. There are many ways to classify stock. Two major ones are size, called market capitalization, or cap, and company location. Each classification has its own typical level of risk. Large cap stocks include the 500 biggest companies in the U.S., Apple, Walmart, Disney, Ford, McDonald's, Ever heard of the S&P 500, or Blue Chips, same thing. Keep in mind, all stock is risky, but these are generally considered the least risky. Mid cap stocks include roughly the next 400 companies by size, smaller, but still fairly well-established. They're considered riskier than large cap. Following large cap and mid cap take the next 2,000 companies and you've got small cap stock. While they have potential for greater growth, they also have the greatest risk. Then there's international stock. Ownership and companies located in developed nations outside the U.S., like BMW and Germany and Sony in Japan. They carry about the same level of risk as U.S.-based large cap stocks. The highest level of risk is found with emerging market stock. This is stock and companies located in developing nations like India, Mexico, and Russia. There are two ways to make or lose money in the stock market. You see, when you own a stock, you actually own a piece of a company. And as the value of that company increases, the stock price goes up. But if the value of the company goes down, the stock price goes down too. These fluctuations determine the amount of profit or loss. Another way to make money is when the company shares its yearly profit with you in the form of a dividend. Stock prices can go up or down dramatically for all kinds of reasons. As a result, stocks are the riskiest types of investment in your plan. But over a long time, they can also be the most rewarding. Next up, bonds. Bonds are just a loan to a company or government. They borrow by selling a bond, which is simply a promise to repay the buyer in a fixed number of years at a fixed interest rate. When you hear about the US government borrowing money that you ever wondered who they borrow from, chances are it's you, through the investments you make in bonds. If interest rates go down after you buy a bond, its value goes up. If interest rates go up, then your bond value will go down. How much the value goes up or down with a change in the interest rate depends on how long the bond is. The longer the bond, the more risk. As the more the value will go up or down with interest rate changes. However, in general, bonds are less risky than stocks. Cash is, well, cash. In a 401k, it's usually available as a money market or stable value fund. Unlike other assets, there's little risk that your money will lose value. But that doesn't mean there's no risk at all. If you hold too much cash, you are at risk that inflation will leave your money worth less compared to everything else. For example, in 1950, a nickel would buy you a coke. But if you saved that nickel until today, you wouldn't have enough to buy that same coke. Cash loses value over time. Most people with 401k plans invest in mutual funds. These hold many different individual stocks or bonds chosen by professionals for a given level of risk and potential reward. So how do you choose the right mix for your specific needs? You may be surprised to hear that according to the majority of corporate pension plans in the world, there really is a single, best way. It's called Modern Portfolio Theory. The details are a lot of math, but understanding what's behind all the numbers is remarkably simple. In fact, you've probably already heard of it. Don't put all your eggs in one basket. You balance risk and reward by holding lots of different types of investments. The technical term is diversification, and it's the name of the game in investing. So how do you do it right? Most of us understand that if we take more risk, we expect more return. Let's look at the math. The line shows us that for any given level of risk, we can expect a certain rate of return, more risk, more return. The challenge, as you may be aware, is that markets don't move in a straight line, they go up and down. The goal is to buy low and sell high. When one investment type is down, you want to buy. At the same time, you want to sell an investment that is high. In the long run, they all tend to move up, just at different rates, based on risk. Remember, this is your retirement savings, so to invest well, you need to diversify. The goal of diversification is what modern portfolio theory is all about, getting an optimal rate of return for the risk in the long run. To do that, you want to invest on what is known as the efficient frontier. The details of drawing the curve are just a lot of math. You could spend the spare hours of your days creating the efficient frontier on a very large spreadsheet, or you can let experts do it for you. In fact, the answers are already right where you want them, online, and probably already in your 401k plan. Guided choice can give you personalized advice recommending a specific mix of stocks, bonds, and cash to reach your retirement income goal. You can even use it to try different strategies and project the results. Whether you take the investment recommendation from our Brainiacs, or choose to do it yourself, hopefully, now you're a little more confident about how retirement investing works. Just remember, if you do it yourself, you need to rebalance your account at least annually to stay on the efficient frontier.