What Mix of Mutual Funds to Put in an IRA?
You can retire and stay retired. Putting together the right mix of mutual funds in your IRA and following a disciplined investment management program can help you reach your financial goals. However, establishing the right mix of mutual funds for your IRA means more than selecting a variety of funds. You must select a combination of funds that invest in different areas of the market to take advantage of all market cycles. Investing is not an event, it is a process. After purchasing a mix of funds you find acceptable, you must continue investing and monitor your progress on at least an annual basis.
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Establish Your Vision
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You must have a clear understanding about what your retirement funds will be used for and when. Retiring at age 55 may require allocating funds in a different fashion than if you were to retire at 70. Likewise, taking your distribution as a lump sum rather than as periodic distributions throughout retirement may require yet another strategy. Keep in mind that it is not just about your retirement age. You may want to rely on funds generated by your IRA for decades after you retire.
Your Investing Foundation
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When establishing a mutual fund portfolio, start with a good foundation. This will consist of those funds in the income or fixed income category. These are funds that invest primarily in treasuries, bonds, money markets and other products that earn a fixed rate of return. This provides your mutual fund portfolio with an element of predictability and lower volatility. As a general rule of thumb, keep this portion of your portfolio tied to your age. For example, if you are 40, you should have 40 percent of your portfolio in this category. This process will help ensure that your portfolio becomes less volatile as you age.
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Build Your Portfolio
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Once you've established a solid foundation, you must develop a growth strategy. Set aside 50 percent of your remaining funds for an equity income fund. This type of fund typically invests in common stocks of companies that pay dividends. This provides you with protection against inflation as well as an opportunity for rising income. Set aside half of what remains for a growth fund. These funds invest in companies with potential for extraordinary growth. Instead of paying a dividend, they use those funds to grow the company. Use the remaining amount to select a broad commodities fund. This fund will grow with inflation, as it will have percentages dedicated to grains, energy and precious metals. After you have established these basics, use more advanced strategies.
Monitor Your Progress
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As you age and your life changes, and as the market changes, your portfolio may need to change. You must evaluate these changes and ensure you are re-balancing your mix of mutual funds. Re-balancing is the process of buying and selling funds in your portfolio in order to maintain your desired percentages. Otherwise, you may find that because some funds have grown faster than others, you are taking on more risk than you intended. Everyone has different goals and desires, so consider the advice of a financial professional when establishing an investment strategy.
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