With company pensions disappearing, more and more workers are being asked to save for their own retirements. While creating your own retirement fund provides some good opportunities, it also presents a number of challenges. One of the primary challenges is choosing the right funds to build your retirement nest egg.
Growth Stock Funds
Young investors with decades to go before retirement can generally afford to take a bit more risk with their stock market investments. Those young investors can use aggressive growth stock funds to grow their portfolios in the early years, then slowly reduce their exposure to the stock market as retirement gets closer. As with any managed mutual fund, it is important to review the performance of the funds you have available. If you are working with a 401k plan, your employer might offer only a handful of growth stock funds, and you will need to choose the fund with the best performance.
While managed mutual funds attempt to time the market and choose the next top performing stocks, index funds simply buy and hold all the companies in a given index. According to information published in Money Magazine, over the long term, this buy-and-hold approach provides superior returns to most managed funds. In addition to those benefits, index funds tend to have very low costs, since they do not have to pay money managers to choose the next hot stock.
Target Date Funds
Target date retirement funds attempt to take the guesswork out of changing your asset allocation. As investors near retirement, experts recommend that they put less of their money into stocks and more into bonds and fixed-income investments. This strategy is intended to reduce the risk of the overall portfolio. With a target date retirement fund, workers choose the fund whose date is closest to the year they plan to retire. The fund manager then chooses investments based on how far away that retirement date is. The performance of these funds varies quite a bit, so it is vital for investors to review the annual performance in both up and down markets. Before you invest in any target date retirement fund, get a prospectus for the fund and check the performance carefully. Be wary of funds that were up less than the market as a whole in good times, or down more than the market in bad years.
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The Best Mutual Funds for Retired People
The Best Mutual Funds for Retired People. ... Choose your retirement funds carefully. stock market analysis screenshot image by .shock from Fotolia.com.
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