Hi all,

I recently opened up my 401(k) plan. I'm 23 and still ton of miles away from the retirement. While I was completing the application, I came up to a page where I could make investment in different options (Equity, Stocks, Bonds).

I've asked my friend who work in Merrill Lynch about this and he has told me that my retirement money goes to investment.

I have put 5% of my paycheck into 401(k) retirement. Also 70% to three different equity options, and 30% to two bonds.

Can you explain how these equity and bonds work? As far as my knowledge goes, 401(k) works as when I put $50 on 401(k) my company matches $50 if ($1 for $1 case). What does these equity/stock/bonds have to do with 401(K)?

Am I potentially going to lose money if my investments do poorly? Thanks for the help everyone!

When you invest your $50, and your company adds $50 to it, the plan administrator takes the total of $100 and invests it into an account with your name on it using the mix of investments you have specified. So for you they would put $70 into the equity investment funds and $30 into the bond funds. This continues with each paycheck, so that over time you build a nice healthy investment in the 5 funds you specified. The plan should send you a statement at least quarterly showing how much you've invested and how your account is growing (one hopes).

Can your investment go down? Sure it can - that's the nature of the stock and bond markets. However, given your employer's match it is unlikely that the value could fall so far as to be worth less than what you put in. Combine that with the fact that your investments are pre-tax, and there's really no better deal around, so it's good that you are taking advantage of it. At your age the 70%/30% split that you picked for stocks versus bonds is pretty good - some might recommend going a bit more aggressive on stocks, but that's a matter of personal preference and your risk tolerance. Given that you have about 40 years to retirement, you can expect that there will be times when your investments go up and times they'll go down, but on average, over time you should experience a nice healthy return.