Información patrimonial

Investing 101: What to know outside your 401(k) plan

When you invest outside your 401(k), two important concepts to understand are asset allocation and diversification.

You want to make sure you’re making the right moves with your money. You already know investing matters, and your 401(k) is hopefully growing into a strong foundation for your future. But retirement may not be your only goal.

If you're aiming to save for other goals, build an emergency fund, or look for potentially higher returns on your cash, a taxable cuenta de corretaje could offer more options and more flexibility.

Ready to explore additional ways to invest but not sure how to begin? We’ll cover the basics, including asset allocation and diversification concepts, and walk through the potential advantages of investing outside your 401(k).

What should you consider before investing outside your 401(k)?

Before setting up investments in a taxable brokerage account, you should determine whether you are maximizing contributions to a tax advantaged account, such as a 401(k), 403(b), traditional IRA or Roth IRA.

Contributions to traditional 401(k) accounts may be tax-deductible, so not only might you pay less in taxes today, but your earnings can grow tax‑deferred until you withdraw them in retirement. Many companies offer a 401(k), and may even match a portion of your contributions up to a specified percentage. If you’re offered a match, it is generally recommended that you take full advantage of it.

Roth IRA and Roth 401(k) contributions are not deductible, but qualified withdrawals are tax free, subject to age and five year holding period rules.

What are examples of core principles investors need to understand?

The two foundational principles of investing are asset allocation and diversification.

Asset allocation is the way you divide your investments across differing major asset classes.

Diversificación means spreading your investments so no single holding determines your outcome. This generally reduces the impact of volatility in any one asset class.

Alan McKnight, Regions Chief Investment Officer, highlights why diversification matters. “Certain types of securities—whether it’s bonds or stocks—may help to smooth the path,” he says. “You need to have a ballast in the portfolio to minimize long term risks.”

What are the primary asset classes?

The three primary asset classes are equities, fixed income and cash equivalents. Each plays a different role in your portfolio.

Valores (acciones)

Stocks represent partial ownership in a publicly traded company. Categories include large cap, mid cap, small cap and international stocks, along with sectors like healthcare and banking.

“With stocks, you own a share of a company, and the goal is for the value of the share purchase to appreciate over time,” McKnight says.

Aggressive portfolios typically include more equities and may experience more volatility. They’re most appropriate when you have a higher risk tolerance and have a longer time horizon to ride out downturns.

Fixed income (bonds)

Bonds act as IOUs from corporations or government entities. Bond categories include corporate, government and municipal issues, each with ratings to help assess creditworthiness. For example, an investor can hold a core portfolio of investment grade domestic bonds and also have exposure to high yield and foreign bonds.

“With bonds you receive fixed interest payments plus the principal payment at maturity,” McKnight says. “That principal amount is what the issuing corporation must pay to the bond holders.”

Cash equivalents

Cash equivalents include money market holdings, certificates of deposit, Treasury bills and other short term instruments that typically can be easily converted to cash.

How can you begin expanding your investment portfolio?

To invest beyond retirement accounts, you can open a brokerage account through a licensed brokerage firm. Brokerage accounts have no contribution limits, but dividends, interest, and realized capital gains are taxable in the year earned.

Individual stocks and bonds require research, so many investors choose mutual funds or exchange traded funds (ETFs) for their built in diversification and professional management. These pooled vehicles can help determine holdings and asset allocation on your behalf, based on your investment objectives, risk tolerance and time horizon.

Periodic reviews by an advisor are recommended because funds can hold similar underlying assets. For example, you might believe you're diversified because you hold several separately managed large cap mutual funds, but an advisor’s analysis can reveal that the holdings within the funds may overlap.

How should you think about risk when investing?

Understanding your personal risk tolerance is essential to building a portfolio that aligns with your goals.

McKnight says the critical element is “understanding how much risk you're willing to bear to generate the return that is needed and trying to bridge the gap between what is required and what is possible.”

Achieving higher potential returns may require taking on more risk, but investors should understand the trade offs.

Why invest at all if my 401(k) is already growing?

Investing outside your 401(k) may help you build wealth more flexibly.

What is the main difference between a stock and a bond?

A stock is partial ownership in a company. A bond is a loan to a corporation or government entity. Stocks may pay dividends while bonds typically pay fixed interest and return principal at maturity.

Do mutual funds and ETFs help with diversification?

Yes. Mutual funds and ETFs may provide exposure to many holdings at once, which can reduce risk compared to owning single stocks or bonds.

Why does diversification matter so much?

Diversification may help reduce exposure to any single asset. Different securities may provide a ballast for one another so that some parts of a portfolio may rise when others fall.

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