To build substantial retirement savings, you must take on some risk. But a good mix of mutual funds can help reduce that risk without sacrificing steady growth.
Over the last few years, mutual fund investors have lost their appetite for risk. Nearly 25% say they are okay with below-average returns if it means little or no risk of losing principal. But it's nearly impossible to successfully invest for retirement without taking on some risk.
So what's an investor to do? Diversify!
How Not to Diversify
Diversification is an investing concept that means you spread your money out over several types of investments, reducing risk and maximizing returns. For example, a portfolio that consists of one company's stock is not diversified. The value of that stock can be wiped out with a single CEO misstep or poor earnings report.
Many investors get caught up in single stocks by investing in their employer's stock. At the time of the BP oil spill, employees had nearly 33% of their 401(k)s tied up in BP stock. In the following weeks, the stock lost half its value, and in late 2012, it was still trading at 30% below its 2010 high.
Diversification Made Easy
Mutual funds make it easy to diversify your retirement investments. For $700, you could buy one share of one stock like Apple. Or you could buy several shares of a mutual fund that invests in dozens of companies, including Apple.
But buying one mutual fund isn't enough diversification for your retirement savings. Dave recommends an equal mix of four types of mutual funds that compliment one another.
• Growth funds invest in established, less risky companies. They have the potential for strong returns without following scary market swings.
• Growth and income funds focus on big-name companies, providing stability in down markets and steady growth when the market rebounds.
• Aggressive growth funds give your portfolio a kick by investing in smaller companies with big growth potential.
• International funds allow you to invest in household brands that aren't based in the U.S.
These fund types work as a team to lower your risk without stifling investment growth. You can't diversify away 100% of your risk. But by selecting this mix of mutual funds with a history of strong returns, you can expect long-term growth that's worth the risk you're taking.
Original article found here
Posted on Shalom Adventure by: B Ellen Gurien
