Mutual funds can save you research time in investing for retirement
Continued from Part 1 (Why Mutual Funds?)
The first answer is that they are not mutually exclusive strategies.
To get at the heart of answer though, we need to know what a mutual fund is. A mutual fund is a professionally managed collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
To invest in the mutual fund, you buy shares in the fund, saving you the trouble of having to buy each component stock. Therefore, you can participate in multiple stocks or bonds without incurring the transaction costs of buying each one.
In addition, you save time and therefore money by buying the manager’s research into each component of the mutual fund, rather than taking the time to research each mutual fund component stock.
Therefore mutual funds are a great investment vehicle for those who have day jobs and limited time. Obviously, some work is still required for even mutual fund investors, but it is much reduced.
Which Mutual Funds Can and Should I Buy?
There is no one size fits all answer to this. You have to buy the mutual funds that best fit your situation. However, there are some general guidelines to the process.
- Like stocks, you should generally have more stock funds at a younger age and more fixed interest or bond funds as you near retirement.
- You should be exposed to international markets as well as the domestic market. Therefore, you might choose to have 10-25% of your mutual fund investments comprising companies in foreign countries.
- Do not be greedy and take money off the table of your mutual fund exceeds your expectations.
- Know your risk and don’t invest in mutual funds beyond your risk tolerance.
- Don’t panic when the market goes through its periodic swoons and don’t sell in such panics if your fund has strong fundamentals.
- Use dollar cost averaging by buying shares consistently every month.
Index funds are a great way to invest in an entire segment of the market e.g.,Fortune 500 inn automatic way. A Fortune 500 mutual fund simply buys all funds in the Fortune 500 – management is passive. In this case, if that segment rises, so do you. If it falls, you fall too.
Target funds are also a relatively new type of fund. These funds have different dates associated with them, which are retirement dates. So if you planned to retire in 2042, you can buy a Target Fund dated 2040-2045.
Such funds tend to be more risk-seeking the farther away they are from the target date and more conservative the closer they get to it. However, this helps take the work out of managing your mix of mutual funds, which can be time-intensive to do well. All workers should explore target funds if they are available.
Last, do your research. Websites like Morningstar and Cnnfn can help you assess past performance of mutual funds and other helpful indices. Spend the time. It is worth it. Also, consult your financial adviser when you make all investment decision.
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