So you’ve just accumulated $5,000 in your IRA and now you need in order to reverse it. It is not feasible, if not impossible to invest it directly into stocks and or bonds so you’ll want to invest in a mutual fund or ETF.
You could split your investment and invest in two or three funds, but if we presume that you will continue to make contributions to your retirement account and that those future investments can go into other funds, our goal for today is to help you choose your first mutual fund.
Let’s assess your situation.
You do over or under 50 years old? If you are older, you have somewhat less time to invest, making the risk of a reversal greater for you so you’d want to invest more conservatively. If you are younger—or much younger—you can and should tolerate a bit more risk.
How do you believe that about risk? Does the idea that you could check the value of your mutual fund at some point in the future and discover that its value has dropped to send you into a panic? Take care of the idea that it might be worth 20 percent more in a year excite you? Would know that your retirement savings are at risk keep you from sleeping at night?
If you conclude that you can tolerate investment risk well, then you should be considering mutual funds that get involved in stocks. Their values rise and fall more than funds that get involved in bonds, but over the long haul you should be expected to earn more in stocks than bonds. If you don’t tolerate risk well, you may want to do your first investment in a bond fund.
If you feel panicked about risk, please consider that without taking some risk, it is virtually impossible to rescue enough for retirement. Risk free returns don’t earn sufficient interest to keep pace with the value eroding impact of inflation. Money in the bank is better that no money at the bank, but it will be worth less tomorrow than it is today. To retire comfortably you need to go comfortable with moderate risk.
Morningstar is a private company that rates and categorizes mutual funds. There are dozens of categories (it.Ly/TUO79E). Your first mutual fund investment in your IRA could come from one of the following three categories:
Large Blend: A large blend fund invests in the stocks of large companies with a balance of growth and value investments (growth stocks are those projected to grow faster than the market and usually do not pay dividends and value stocks are those that are perceived to be trading below some other measure of value).
Moderate Allocation: A moderate allocation fund invests in both stocks and bonds, with more money invested in stocks than bonds. A portion of the money may also be allocated to cash. These funds expect to achieve some appreciation as well as to generate returns through dividends.
Long-Term Government Bond: These funds invest in treasury bonds that mature more than ten years in the future. Such bonds have no credit risk, that is no risk of not being performed to schedule, but as interest rates change, the value of the bonds will fluctuate.
Each of these fund categories would make a good chief fund for your retirement savings. They offer high expected returns—compared to what you can earn in a bank account. They are shown in order from most risky to least risky. You can decide which of these three best represents your risk tolerance depended on your individual situation.
Once you’ve decided upon a category, you’ll want to choose an unusual fund based primarily on the expenses. Your broker should give you a list of mutual funds you can purchase with no transaction fees. You’ll also want to choose a fund that doesn’t charge a “load” or upfront fee. You’ll also want to avoid marketing and distribution fees called 12b-1 fees. Finally, you’ll want to be for funds with low expense ratios. All of these fees must be disclosed so you can figure out which fund is best for you.
Your broker should provide a screener to allow you to choose a mutual fund that suits your criteria. You may also try the Yahoo (it.Ly/Khm6m3) mutual fund screener.
With that, you’re all set to make your first mutual fund investment in your IRA.
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