401k(possibly IRA) Questions

[d4mo]

So when you have an 401k, and say you contributed $2000 and your employer contributed $1000 in a year. But your statements says your 401k is worth say $3500.

Does that mean your investments are worth that much or you actually have that much money in your 401k....

I guess what I'm asking is, I know that most 401k's are invested in mutual funds and bonds and things of that nature, but does the 401k manager buy and sell mutual funds and then you get the profits? Or how exactly does that work? Like if I was invested in 100% percent mutual funds in the above example. Was something bought and sold, or does that just mean that the mutual funds I had went up %15 but I'm still holding them?

 

[rcpratt]

Does that mean your investments are worth that much or you actually have that much money in your 401k....

That's the same thing.

I guess what I'm asking is, I know that most 401k's are invested in mutual funds and bonds and things of that nature, but does the 401k manager buy and sell mutual funds and then you get the profits? Or how exactly does that work? Like if I was invested in 100% percent mutual funds in the above example. Was something bought and sold, or does that just mean that the mutual funds I had went up %15 but I'm still holding them?

Any changes in investments in mutual funds are reflected in changes in the fund price and/or dividends.

 

[d4mo]

That's the same thing.

Maybe I didn't explain it well.

Lets try this:

You have $1000 invested and for simplicity sake you stop contributing. You are invested in 1 mutual fund that trades at $10. It goes up 10% so you are at $1100 and the fund is at $11 at the end of the year. Next year the fund goes down 10% to $10. Is your investment now worth $1000? Or does the 401k plan administrator monitor things and sell the fund at 10% up and buy more later?

Basically, if I put $1000 in and never add more, and 40 years later the mutual fund is only 15% up from when I started, is my 401k worth 1150 or has there been alot of buying and selling in those 40 years make my account worth potentially alot more.

 

[DaveSimmons]

The 401k service does not invest anything for you. It is just a service to take care of transfers from payroll, add employer matching, and to buy mutual fund shares based on the funds that you pick.

The funds themselves are run by other companies like Fidelity, Vanguard, etc. -- those are the companies that buy and sell the stocks or bonds.

Then, there are 2 kinds of funds "index funds" and "actively managed" funds.

"Index funds" work with a fixed list of stocks or bonds, for example the "S & P 500" is a list of the 500 biggest U.S. companies. So if you pick a S&P 500 mutual fund it will just buy shares of those 500 stocks. No one tries to "play the market" and pick winners and losers.

"Actively managed" funds are sets of stocks in an area like large companies ("cap" = capitalization = size). Active funds do pay someone or a team to gamble on picking stocks. But: something like 80% of funds fail to do better than the S&P 500 index funds.


Any change in value comes from changes in the values of the fund shares that you own and have told the service to buy from your payroll contribution. The 410k service is not buying and selling shares without telling you.

 

[rcpratt]

Basically, if I put $1000 in and never add more, and 40 years later the mutual fund is only 15% up from when I started, is my 401k worth 1150 or has there been alot of buying and selling in those 40 years make my account worth potentially alot more.

The former.