Question

Congratulations! You have just graduated from your University. Your first day on your new job involves a lot of paperwork including your decision to participate in the company 401K plan. First, should you participate? Second, describe the benefits of diversification if any including adding international stocks to your investment portfolio? You must include a full explanation to support your answer.

Answer 1

One shall invest in 401 K plan as soon as possible as the earlier one starts more savings one shall have in future. Also the amount will be compounded over a larger period. And we know the power of compounding is very large, hence earlier the better. Also the amount that one invests, shall be matched by the employer upto an extent so again it is very beneficial as this shall just double the investment.

International stocks are beneficial to add as they provide diversification. The reason is that they have a lower correlation with domestic stocks. Lower correlation leads to a lesser standard deviation of the portfolio leading to a lesser risk. Also investing in stocks of developing countries may lead to a much highe rrteurns. So it is better to invest in them. There may also be stocks in some countries which industries is not present in domestic country. For example an investor from US may inevest in diamong mining company in South Africa. This industry is small in US and this may again provide diversification.