Genwich Life Services LLC "Successfully guiding multi generational families through life stage planning" |
Three Investment Strategies
Ready to put your newfound knowledge about mutual funds to work? The following
three investment tactics, listed in order of easiest to most difficult, will set you on track
to meet your financial goals, whether you're 20 years away from needing your money
or two.
Strategy No. 1: The No-Brainer
Invest in a lifestyle fund
Interested in keeping things as simple as possible? Lifestyle funds—which are funds
of funds—may be your answer. These were created specifically for investors who
want to invest in a single fund and be done with it.
"They're great if you don't want to oversee a lot of moving parts," says Christine Benz,
associate director of fund analysis at Morningstar Inc., the Chicago-based mutual
fund tracker. "And they handle an issue that tends to be very nettlesome—your asset
allocation."
This is how they work. You choose a lifestyle fund based on your targeted retirement
year. To make this easy, the funds are named by years. For example, if you're 56
years old and you're planning to retire at 65 (in the year 2015), you might select the
Fidelity Freedom 2015 Fund or the T. Rowe Price Retirement 2015 Fund.
The fund divides your investments between stocks and fixed-income investments
according to how many years you have until you plan to stop working. As you
approach and move into retirement, the fund gradually adjusts the allocation to
become more conservative. For example, the Fidelity Freedom 2015 Fund currently
holds 58 percent in stocks and the rest in bonds and cash. By 2015 it will have less in
stocks and more in bonds and cash.
If you like the idea of a lifestyle fund, your first task is to decide which fund company
you want to work with. At least 15 fund families have lifestyle funds, and each of them
offers about eight or nine funds geared to people with different retirement dates. T.
Rowe Price, for instance, has the Retirement 2010 Fund, Retirement 2015 Fund, and
more, in five-year increments, up to the Retirement 2045 Fund.
Each of their allocations differs—sometimes by a lot. Among T. Rowe Price,
Vanguard, and Fidelity, the most aggressive funds are T. Rowe Price's, while
Vanguard's are the most conservative and Fidelity's are moderate. For example,
Vanguard's 2005 lifestyle fund has 31.4 percent in stocks, while T. Rowe Price's 2005
lifestyle fund carries 60.5 percent in stocks.
Also, as when picking individual mutual funds, keep an eye on expenses. The funds
invest in a portfolio of underlying mutual funds, rather than individual securities. So
you will pay the expenses charged by the underlying funds. Some lifestyle funds,
however, charge you an extra expense on top of the underlying funds' expenses.
(Look this up at www.morningstar.com.) Vanguard, T. Rowe Price, and Fidelity are
among fund companies that do not charge these extra fees.
Strategy No. 2: El Cheapo
Stick with index funds
If you want a little more control over your portfolio than you get with a lifestyle fund but
still want simplicity, consider investing in index funds.
These funds invest in a portfolio of securities that mirrors the indices they are trying to
track. For instance, if you invest in a fund that tracks the S&P 500, an index of 500
large-company stocks, it will hold all the stocks in that index in similar proportion. For
example, if General Electric makes up 3 percent of the S&P, the index fund will also
hold 3 percent in that company. The performance of your fund will match the
performance of the index it is modeled after.
These differ from the majority of funds, whose portfolios are actively managed by
professional stock pickers. But here's the surprising thing about index funds: they
beat actively managed funds about 80 percent of the time. True, when the S&P 500
takes a dive, so will your returns, but most actively managed funds are likely to have
even bigger losses than your index fund.
What's more, average expenses on index funds tend to be much lower than those of
actively managed funds. The Vanguard Total Stock Market Index Fund, which invests
broadly across U.S. stocks, charges 0.19 percent, compared with the average 1.42
percent for U.S. stock funds. "These funds are a good way to get started," says Larry
Carroll, a financial planner in Charlotte, North Carolina. "They're inexpensive, and
you're not going to make any big mistakes if you invest in them."
That said, the returns of two index funds tracking the same index can vary, simply
because one has higher expenses. For example, the three-year return through
October 26 for the Vanguard 500 Index Fund was 11.72 percent, while the AIM S&P
500 Index returned 11.10 percent (both funds tracked the S&P 500, whose return was
11.86 percent).
All it takes to get started are two funds: one broad stock-market fund, such as
Vanguard's, and a plain-vanilla government-bond fund, such as Vanguard Short Term
Treasury Fund. Since the only difference between index funds is the cost, you might
as well stick with Vanguard, which invented the index fund concept and whose
expenses are rock-bottom.
Strategy No. 3: For Experienced Investors
Buy managed funds
One advantage of index funds is that they keep pace with the market. But the big
disadvantage is that they can't beat the market. If you'd like to try, consider funds that
are actively managed by pros. This
will take more effort on your part to select funds and keep tabs on whether your funds'
managers are doing a good job.
Using the techniques discussed previously, divide your money between two well-
diversified funds—one that invests in stocks and the other that invests in bonds. "If
you get two good funds with good track records and good management, then two
funds are all you really need," says Denise Leish, a partner at Money Plans, a
financial-planning firm in Silver Spring, Maryland.
Over time you may want to add funds to boost exposure to other areas of the market.
However adventuresome you become, though, don't exceed five funds, says Leish. If
you add too many funds, you're bound to end up holding the same kinds of
investments in more than one fund, which can throw off your asset allocation and
won't give you any added benefit.
Also, when you select your funds, stick with mutual fund companies that have been in
the business for at least five to ten years, such as Vanguard, T. Rowe Price, Fidelity,
American, PIMCO, AIM, and Oakmark.
And, in the name of simplicity and keeping costs down, invest directly through the
fund companies—rather than through a broker.
Regardless of which investment strategy you choose, be sure to check in once or
twice a year to make sure your asset allocation is still on track. If you invest in index
funds or actively managed funds and you started out with 70 percent in stocks and 30
percent in bonds, after a big surge in the stock market you may find your stock
allocation has ballooned to 80 percent. Many funds, including lifestyle funds, include a
provision for automatic rebalancing based on your investment goals, but others don't,
so you'll want to check on them periodically and rebalance your portfolio accordingly.
Finally, aim to sock away 10 percent of your annual income, but don't get discouraged
if you can't—every bit will count over time. Trying to find extra money? Write down all
your monthly expenses and see where you can cut back, then have that money
automatically withdrawn from your bank account each month. "Anytime you pass up a
frivolous expense and save the money instead, pat yourself on the back,' says Lynn
Ballou, a financial adviser in Lafayette, California. "That's what it's going to take to
achieve financial freedom and security during your retirement."
Ready to put your newfound knowledge about mutual funds to work? The following
three investment tactics, listed in order of easiest to most difficult, will set you on track
to meet your financial goals, whether you're 20 years away from needing your money
or two.
Strategy No. 1: The No-Brainer
Invest in a lifestyle fund
Interested in keeping things as simple as possible? Lifestyle funds—which are funds
of funds—may be your answer. These were created specifically for investors who
want to invest in a single fund and be done with it.
"They're great if you don't want to oversee a lot of moving parts," says Christine Benz,
associate director of fund analysis at Morningstar Inc., the Chicago-based mutual
fund tracker. "And they handle an issue that tends to be very nettlesome—your asset
allocation."
This is how they work. You choose a lifestyle fund based on your targeted retirement
year. To make this easy, the funds are named by years. For example, if you're 56
years old and you're planning to retire at 65 (in the year 2015), you might select the
Fidelity Freedom 2015 Fund or the T. Rowe Price Retirement 2015 Fund.
The fund divides your investments between stocks and fixed-income investments
according to how many years you have until you plan to stop working. As you
approach and move into retirement, the fund gradually adjusts the allocation to
become more conservative. For example, the Fidelity Freedom 2015 Fund currently
holds 58 percent in stocks and the rest in bonds and cash. By 2015 it will have less in
stocks and more in bonds and cash.
If you like the idea of a lifestyle fund, your first task is to decide which fund company
you want to work with. At least 15 fund families have lifestyle funds, and each of them
offers about eight or nine funds geared to people with different retirement dates. T.
Rowe Price, for instance, has the Retirement 2010 Fund, Retirement 2015 Fund, and
more, in five-year increments, up to the Retirement 2045 Fund.
Each of their allocations differs—sometimes by a lot. Among T. Rowe Price,
Vanguard, and Fidelity, the most aggressive funds are T. Rowe Price's, while
Vanguard's are the most conservative and Fidelity's are moderate. For example,
Vanguard's 2005 lifestyle fund has 31.4 percent in stocks, while T. Rowe Price's 2005
lifestyle fund carries 60.5 percent in stocks.
Also, as when picking individual mutual funds, keep an eye on expenses. The funds
invest in a portfolio of underlying mutual funds, rather than individual securities. So
you will pay the expenses charged by the underlying funds. Some lifestyle funds,
however, charge you an extra expense on top of the underlying funds' expenses.
(Look this up at www.morningstar.com.) Vanguard, T. Rowe Price, and Fidelity are
among fund companies that do not charge these extra fees.
Strategy No. 2: El Cheapo
Stick with index funds
If you want a little more control over your portfolio than you get with a lifestyle fund but
still want simplicity, consider investing in index funds.
These funds invest in a portfolio of securities that mirrors the indices they are trying to
track. For instance, if you invest in a fund that tracks the S&P 500, an index of 500
large-company stocks, it will hold all the stocks in that index in similar proportion. For
example, if General Electric makes up 3 percent of the S&P, the index fund will also
hold 3 percent in that company. The performance of your fund will match the
performance of the index it is modeled after.
These differ from the majority of funds, whose portfolios are actively managed by
professional stock pickers. But here's the surprising thing about index funds: they
beat actively managed funds about 80 percent of the time. True, when the S&P 500
takes a dive, so will your returns, but most actively managed funds are likely to have
even bigger losses than your index fund.
What's more, average expenses on index funds tend to be much lower than those of
actively managed funds. The Vanguard Total Stock Market Index Fund, which invests
broadly across U.S. stocks, charges 0.19 percent, compared with the average 1.42
percent for U.S. stock funds. "These funds are a good way to get started," says Larry
Carroll, a financial planner in Charlotte, North Carolina. "They're inexpensive, and
you're not going to make any big mistakes if you invest in them."
That said, the returns of two index funds tracking the same index can vary, simply
because one has higher expenses. For example, the three-year return through
October 26 for the Vanguard 500 Index Fund was 11.72 percent, while the AIM S&P
500 Index returned 11.10 percent (both funds tracked the S&P 500, whose return was
11.86 percent).
All it takes to get started are two funds: one broad stock-market fund, such as
Vanguard's, and a plain-vanilla government-bond fund, such as Vanguard Short Term
Treasury Fund. Since the only difference between index funds is the cost, you might
as well stick with Vanguard, which invented the index fund concept and whose
expenses are rock-bottom.
Strategy No. 3: For Experienced Investors
Buy managed funds
One advantage of index funds is that they keep pace with the market. But the big
disadvantage is that they can't beat the market. If you'd like to try, consider funds that
are actively managed by pros. This
will take more effort on your part to select funds and keep tabs on whether your funds'
managers are doing a good job.
Using the techniques discussed previously, divide your money between two well-
diversified funds—one that invests in stocks and the other that invests in bonds. "If
you get two good funds with good track records and good management, then two
funds are all you really need," says Denise Leish, a partner at Money Plans, a
financial-planning firm in Silver Spring, Maryland.
Over time you may want to add funds to boost exposure to other areas of the market.
However adventuresome you become, though, don't exceed five funds, says Leish. If
you add too many funds, you're bound to end up holding the same kinds of
investments in more than one fund, which can throw off your asset allocation and
won't give you any added benefit.
Also, when you select your funds, stick with mutual fund companies that have been in
the business for at least five to ten years, such as Vanguard, T. Rowe Price, Fidelity,
American, PIMCO, AIM, and Oakmark.
And, in the name of simplicity and keeping costs down, invest directly through the
fund companies—rather than through a broker.
Regardless of which investment strategy you choose, be sure to check in once or
twice a year to make sure your asset allocation is still on track. If you invest in index
funds or actively managed funds and you started out with 70 percent in stocks and 30
percent in bonds, after a big surge in the stock market you may find your stock
allocation has ballooned to 80 percent. Many funds, including lifestyle funds, include a
provision for automatic rebalancing based on your investment goals, but others don't,
so you'll want to check on them periodically and rebalance your portfolio accordingly.
Finally, aim to sock away 10 percent of your annual income, but don't get discouraged
if you can't—every bit will count over time. Trying to find extra money? Write down all
your monthly expenses and see where you can cut back, then have that money
automatically withdrawn from your bank account each month. "Anytime you pass up a
frivolous expense and save the money instead, pat yourself on the back,' says Lynn
Ballou, a financial adviser in Lafayette, California. "That's what it's going to take to
achieve financial freedom and security during your retirement."