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Investing & Retirement

How to Invest in the Right Mix of Mutual Funds

8 Minute Read

So, you’re ready to pick some mutual funds. Awesome! If you follow what I teach, you know you want to invest in good growth stock mutual funds and spread your investment across four categories: growth, growth and income, aggressive growth and international. But maybe you keep getting lost in all the lingo.

How are you supposed to build a solid nest egg if you can’t even make sense of your options? I know it can be intimidating, but hang in there.

These five steps can help you choose the right mix of funds. They include my personal advice as well as some guest advice from Brant Spesshardt, an investing professional in Raleigh, North Carolina.

1. Understand the Terminology Behind Mutual Funds

Mutual fund companies, 401(k) plans, and third-party rating services often use different labels to categorize funds. That’s why it’s important to have a firm grip on the terminology behind your investment goals.

So, let’s take a closer look at the four recommended mutual fund categories:

  • Growth and income: These funds create a stable foundation for your portfolio. Brant describes them as big, boring American companies that have been around for a long time and offer goods and services people use regardless of the economy. Look for funds with a history of stable growth that also pay dividends. You might find these listed under the large-cap or large value fund category. They may also be called blue chip, dividend income or equity income funds.

  • Growth: This category features medium or large U.S. companies that are still experiencing growth. Unlike growth and income funds, these are more likely to ebb and flow with the economy. For instance, you might find the latest it gadget or luxury item in your growth fund mix. Common labels for this category include mid-cap, large-cap, equity or growth funds.

  • Aggressive growth: Think of this category as the wild child of your portfolio. When these funds are up, they’re up. And when they’re down, they’re down. This volatile growth usually accompanies smaller companies. "So small-cap funds are going to qualify—or even a mid-cap fund that invests in small- to mid-sized companies," Brant says. But size isn’t the only consideration. Geography can also play a role. "Aggressive growth could sometimes mean large companies that are based in emerging markets," he adds.

  • International: International funds are great because they spread your risk beyond U.S. soil. That way your retirement fund doesn’t totally tank if America goes through an unexpected downturn. It also gives you a chance to invest in big non-U.S. companies you already know and love. You may see these referred to as foreign or overseas funds. Just don’t get them confused with world or global funds, which group U.S. and foreign stocks together.

2. Diversify Your Fund Portfolio

Whenever someone talks to you about investing, the word diversification probably gets thrown around a lot. All diversification means is you’re spreading your money out across different kinds of investments, which reduces your overall risk if a particular market goes south.

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To diversify your portfolio, you need to put money into each of the four types of mutual funds mentioned above. The percentage of your money that you put into each of those four funds will be determined by two things: your risk tolerance and your time horizon (a fancy term for how much time you have until you’d like to retire).

For most investors, spreading their investment equally across growth, growth and income, aggressive growth and international is all the diversification they need.

A qualified investing professional can help you understand your options and pick mutual funds in each of these categories.

How to Invest in the Right Mix of Mutual Funds

3. Don’t Chase Mutual Fund Returns

It can be tempting to get tunnel vision and focus only on funds or sectors that brought stellar returns in recent years. But Brant cautions against that strategy.

"Nobody can time the market," he says. "Investors just have to remember you never want to put all your eggs in one basket. It’s long term, and you want to try to keep your investments as simple and as boring as possible."

Before committing to a fund, take a step back and consider the big picture. How has it performed over the past five years? What about the past 10 or 20 years? Choose mutual funds that stand the test of time and continue to deliver strong long-haul returns.

Nobody can time the market. It’s long term, and you want to try to keep your investments as simple and as boring as possible.
—Brant Spesshardt, Investing professional

4. Consider the Fees

If your investments are getting cut down by excessive fees, it can cost you a lot of money in the long run. That’s why it’s so important to understand what you’re paying for and why you’re paying for it.

It’s impossible to invest in retirement for free. Fees come with the territory and mutual fund companies make money from the fees they charge you, the investor. But the goal is to pick mutual funds that have solid track records and have reasonable fees.

Some mutual funds charge investors a sales charge on purchases, often called a load. So whenever you see load, think sales charge or commission. The load is either paid up front at the time of purchase (front-end load) or when the shares are sold (back-end load).

Then there are other mutual funds that don’t have a sales charge, known as no-load funds. You can buy and sell these funds at any time without paying a commission or sales charge, but there are some significant drawbacks. They often have higher expense ratios—I’ll get to those in a second—and charge a bunch of other direct fees (redemption fees, exchange fees and account fees).

An expense ratio—which often shows up on a fund’s prospectus as Total Annual Fund Operating Expenses—is an annual fee that all funds charge investors to cover their annual operating costs. It’ll show up as a percentage on the fund’s prospectus and shareholder reports.

Some funds have higher expense ratios than others. For example, international funds are typically more expensive to operate than growth and income funds, so they’ll normally have higher expense ratios.

While getting started on front-end load funds is a bit more expensive, they’re perfect for long-term investors for a couple reasons. First, their ongoing costs are usually lower than back-end load or no-load funds. And second, that initial sales charge pays your advisor for their time and expertise in helping you choose mutual funds and maintain your retirement plan over the years. Trust me, it pays to have an expert in your corner!

Fee-based investing refers to how a financial advisor is paid. Advisors in a fee-based arrangement can make a commission off what they help you invest in. sell to you. It’s important to know if your advisor is charging you via a fee-based model or a fee-only model, which is a flat fee with no commissions on sales.

Remember, this is your money we’re talking about. You’re calling the shots, so you need to be aware of what you’re being charged and why. Being diligent on fees can end up saving you in the long term.

5. Eliminate the Investing Guesswork

If I’ve said it once, I’ve said it a hundred times: Never invest in anything you don’t understand. No one cares about your future as much as you do, so it’s in your best interest to take charge of your own mutual fund education. But sometimes you need a little help with translation. And that’s where an expert comes in handy.

A good investing professional can help you determine whether the mutual funds you think line up with your objectives really do. Be clear about your goals up front to ensure you and your pro are on the same page before you pick mutual funds.

Want to partner with a pro but don’t know where to start? Try SmartVestor! It’s an easy and free way to find investing help near you.

Find a pro today!

About Chris Hogan

Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.

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