How to Invest in 20 Year Mutual Funds

The fluctuations over time can worry inexperienced investors.

Mutual funds are a type of investment where a investors' money is pooled together to invest in a group of stock or bonds. There are two types of mutual funds: open-ended mutual funds and closed-end mutual funds. Open-ended funds create shares of the fund for each purchase and redeem shares when investors sell. Closed-end funds trade like stocks with a specific dollar capitalization amount and each purchase needs a seller to provide the inventory. Mutual funds are sold a long term investment; investing in funds over a twenty year time horizon requires discipline and patience.

Instructions

1. Determine your current risk tolerance and investment objective. Mutual funds have principal risk meaning you could lose some of your investment if you liquidate when the fund is down. If you are not comfortable with the ups and downs of mutual funds, you should look at more conservative fund options such as bond funds and large capitalization stock funds. While these still have risk and fluctuate, the ups and downs are less dramatic compared to international or small capitalization funds. Choose a diverse portfolio of at least three funds that further lower your risk.

   Choose funds that have a long-term track record. While past performance doesn't guarantee future results, it provides confidence in the management of the fund. If possible, choose a fund family with a portfolio of funds in different risk categories. This may help you down the road to reallocate your assets without extensive fees.

2. Review the fee structure of all mutual funds you are interested in. In the prospectus all fees associated with buying, selling and maintaining each mutual fund are listed.

   There are usually at least three basic share classes: A shares, B shares and C shares. A shares pay a fee up front but often have lower annual expenses. B shares pay no fee up front but have fees for redeeming shares within a specified period of time. Annual fees are often higher. C shares have no up front fee, nor a back-end fee but may have the highest annual fee.

3. Ask what the turnover ratio is for each mutual fund. Understand that even though you may not be selling your shares any time soon, you may have an annual tax consequence if the mutual fund manager is buying and selling equities within the portfolio. This is true even with a tax-free municipal bond fund. If something is sold for a gain, you will generate a taxable event. Funds with high turnover generate more taxes. Look for funds that buy and hold for tax-efficient investing.

4. Buy your funds based on the choices you have made in the previous steps. Monitor investor news, but don't panic over day to day fluctuations.

5. Review your portfolio annually to determine if your objectives and risk tolerance are the same or have changed. New investors will typically become more aggressive in their fund choices in the initial years, particularly if the funds are doing well. Towards the end of a twenty year time frame, you may begin to move back towards conservative investments, preparing for retirement.

   Reallocate the assets in your portfolio to reflect your existing risk tolerance and asset allocation desires.

Tips & Warnings

• For those with a twenty year time horizon that takes them into retirement, a variable annuity may be another investment alternative. Variable annuities allow you to invest in mutual funds under the umbrella of a tax-deferred annuity, reducing annual capital gains.

• Mutual funds and variable annuities are not FDIC insured and have risks.

References

• CNN: Money 101
• SEC: Invest Wisely