Mutual funds offer a variety of advantages that make them an ideal way to invest your retirement savings.
Because they pool the assets of many investors, mutual funds can invest in a wide range of individual securities. As a result, they provide a degree of diversification that individuals simply can’t get on their own. In addition, they’re convenient: shares are easily bought and sold and assets can be quickly transferred from one investment to another in the same fund family (in retirement accounts, these fund exchanges won’t be taxable at the time they’re made). They also offer the benefits of professional management.
Mutual funds can be used like individual securities to provide diversity across and within asset classes. Stock funds, for example, may be selected on the basis of company size (capitalization), industry, geographic area or even investment style (value, blend or growth).
You might, for instance, balance a value fund with a growth fund. Value funds concentrate on promising but out-of-favor stocks, while growth funds zero in on the issues of expanding companies with outstanding earnings potential. Because they rarely perform in tandem, including both types in your portfolio may help lower the total volatility of your stock holdings.
Bond funds, like stock funds, vary in a number of critical ways. Investors can diversify bond funds based on the maturity of the bonds (short-, intermediate or long-term, depending on the average holding period of the bonds in the fund), the issuer (government or corporation), and overall quality (from very safe to highly speculative).
To achieve the diversification your retirement portfolio needs, we believe investors should consider investing in four to eight different categories of funds. Of course, as always, it is prudent to discuss your investment strategy with your financial advisor. Mutual funds can help provide a degree of diversification that individuals simply can’t get on their own.
1Diversification does not guarantee a profit or protect against loss.
Investments in mutual funds are subject to market risk and volatility. Shares my gain or lose value. Investments in securities of growth companies may be volatile. Value investing involves the risk that undervalued securities may not appreciate as anticipated. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Diversification does not guarantee profit or protect against loss.