Investing in your retirement
So-called target-date funds are popular relative newcomers and are designed to take the stress out of investing. They are designed to keep investors on track to hit retirement goals by putting more asset allocation decisions into the hands of the managers who run them.
Like other mutual funds, target-date
funds invest in an array of stocks, bonds
and cash. Many are funds of funds -- that
is, they are composed of several other funds.
As time passes, target-date funds automatically
rebalance their holdings to become more conservative.
But convenience comes with some
warning. These funds' one-size-fits-all approach
is misleading since funds can differ greatly,
depending on who runs them, says Paul Mladjenovic,
a Certified Financial Planner and author of
"Stock Investing for Dummies."
"The mix will depend on the
fund administrators. All the firms that have
plans have different presumptions in place,
so some are more growth-oriented, some less
so. When you choose a target fund, look at
the categories that make up the mix for that
particular fund," Mladjenovic says.
You can investigate target-date funds at www.morningstar.com, where you can compare the underlying assets of the funds as well as performance history and expenses. Here again, personal advice from a financial adviser may help.
Index funds and managed funds
When it comes to picking a mutual fund, it's easy to feel overwhelmed. You've got thousands of different choices.
But you can make quick work of organizing your options by dividing the fund universe into two basic categories: index funds and actively managed funds.
Index funds are designed to
replicate the performance of a particular
market index, such as the Dow Jones industrial
average or the Standard & Poor's 500.
|A quick refresher course
||The Dow is made up of 30 leading domestic companies such as Alcoa, General Motors and Microsoft, and its overall performance is used as a bellwether of the overall economy.
||The 500 large-cap stocks in the S&P 500 represent leading actively traded U.S. companies. Many mutual fund managers pit their performance against that of the S&P 500 index.
Index funds are pretty straightforward
because their holdings mirror that of an index.
As Mladjenovic sums it up: "Index funds can
be run by one person and a computer."
Actively managed funds are an
entirely different story. With these, a mutual
fund manager or team of managers buys and
sells a variety of holdings in an attempt
to beat the fund's comparable index. Therefore,
portfolio turnover is generally higher, the
funds are less tax-efficient and they require
more hands-on management.