Ask a Fool: How Do the Stock Funds in My 401(k) Differ?
Q: I know I should invest the majority of my 401(k) in stocks, but what are the differences among all of the stock funds offered by my 401(k) plan?
Your fund offerings probably have their own unique brand names, but in your plan's literature, there are some common descriptive terms you'll find such as "small-cap growth" or "large-cap blend." Here's what these terms mean.
The first differentiation is growth or value. Growth funds invest in companies growing at a faster-than-average rate, whereas value funds seek to find undervalued, established companies. Generally speaking, growth stock funds are a bit more volatile, but also have the highest long-term return potential. Funds labeled "blend" invest in a combination of the two.
Next is the size of the companies the fund invests in, which is often listed as "large-cap," "mid-cap," or "small-cap." While there is no set-in-stone rule, large-cap companies are usually those with market capitalizations (values) of $10 billion or more, mid caps are companies worth between $2 billion and $10 billion, and small caps are companies worth less than $2 billion. The guideline is that the smaller the companies a fund invests in, the more volatile you should expect it to be.
Also, some of your funds may be labeled "global," "international," or "emerging markets." Most of your 401(k)'s funds are likely invested in domestic equities -- that is, stocks of U.S.-based companies. Global funds invest in companies in the U.S. as well as foreign countries around the world. International funds invest in foreign stocks, and specifically exclude the U.S. Emerging-market funds invest in stocks based in countries with developing economies, such as Brazil, China, and India. International exposure can provide an element of diversification to your retirement savings, and emerging markets can capture some of the volatile, but powerful, growth potential of developing economies.
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