My Dear investor,
By now you are asking me to make some sense of all the different mutual fund choices available to you, so I will try. Let’s recap them from our previous lesson; We have Money Market funds, Bond funds, and Stock Funds to choose from. Within each Major fund type, we have in some cases extremely different choices, however, the majority of your decision making will take place in selecting your stock funds. So, let us move our efforts to a discussion around the multiple stock fund choices (growth, value, blend, index, international, sector, and other). Keep in mind, your company has picked the major funds you can invest in, you more or less decide percentages.
While I went into depth in the previous lesson about your stock fund choices, I didn’t discuss how to choose or select the best ones. Your mix of choices should depend on your risk tolerance. For example, as an agressive investor my portfolio (90% of my 401k is in stock funds) is heavily weighted towards growth, small cap, international and index funds.
No matter what you end up selecting, as a general rule pick at least 10 different funds and keep your percentage in each fund around 10% for optimal diversification. In addition, choose only funds with no-loads (unless a loaded fund is outperforming no load funds, which is highly unlikely). No-load funds (such as Index funds) have consistently outperformed loaded funds year after year for many reasons. Loaded funds are actively managed funds (meaning the company pays investment managers to monitor, and in some cases change what stocks they are investing in for the fund), and and no load funds refers to funds that are setup and left alone. Why don’t you want someone else managing the fund your invested in? Because they have proven to do no better than funds that are left alone, in most cases, you will lose money having your funds actively managed rather than left alone. In a nutshell, choose funds with low management expenses, it will mean more money to be invested versus in some investment managers’ pocket.
Use common sense when selecting from the funds available to you that are suited around your risk tolerance. You can request a prospectus (basically information provided about the funds past performance and future expectations) from Investment providers like Vanguard or Fidelity or whomever you are working with. Look and compare fees within the different funds. Compare their past performance with how long you will be investing to see if it fits your risk tolerance. Make sure the fund is what it says, look at the companies it invests in. Take the time to do research for a couple of hours, it will pay off big time in the long run.