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If the mere mention of the phrase mutual funds has your eyes glazing over with confusion, you’re not alone! We’ve all been there. But the good news is that they’re not as complicated as you may think. With the help of an experienced professional, mutual funds are a great way to invest for your retirement.
What Is a Mutual Fund?
Over 200 years ago, a Dutch merchant had an idea that would change the financial industry as the world knew it.(1) By pooling money from different sources, he created what many believe was the inspiration for the world’s first mutual fund. All of a sudden, the average person with limited resources could invest with much less risk thanks to the "strength" of the diverse investments.
Today, nearly $17.4 trillion of assets like stocks, bonds, cash, and money market accounts are held in mutual funds—professionally managed investment portfolios that allow investors to pool their money together.(2) Each mutual fund is made up of shares that represent holdings in various businesses—things like stocks from your favorite technology, health care and automobile companies.
Mutual funds have proven to be a great option for retirement investing. You don’t have to have a lot of money to get started, and—thanks to their diversity of investments—you can invest confidently because all of your retirement eggs aren’t in one basket!
How Do I Buy a Mutual Fund?
There are multiple ways to invest in, or buy, mutual funds. If it’s an option, the best place to start is the retirement plan offered at your work, like a 401(k). Why? Because it comes with plenty of benefits like:
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- Tax-deferred growth of your investments (tax-free if you have a Roth 401(k))
- An employer match to your contributions that instantly doubles the amount of money you put into your 401(k) (up to a certain percentage of your income)
- Automatic contributions from your paycheck
When reviewing the mutual fund options included in your workplace plan, you’ll want to work with your financial advisor to select the best ones. (More on that later!) Once you’ve made your selections, take advantage of those benefits and invest as much as it takes to receive your full employer match.
If you don’t have a workplace retirement plan, or you’ve maxed out your employer’s match, you can invest in mutual funds through a Roth IRA with the help of an experienced investment professional.
Your goal is to invest 15% of your income for retirement. That’s a big goal that you’ll need to stay focused on long-term, so keep working with your investing pro to make sure you stay on track.
Types of Mutual Funds
In 2016 there were over 9,500 mutual funds in the United States alone and over 100,000 mutual funds worldwide.(3) Each of those funds has its own specific investing strategy and each comes with its own risks and rewards.
With all of those options, it’s important to know how to choose the best funds for you. Start by investing evenly across four different types of mutual funds: growth and income, growth, aggressive growth and international funds. Let’s take a closer look at each.
1. Growth and Income
Growth and income funds are made up largely of stocks from large market capitalization (large-cap) companies like Apple or Microsoft who are valued over $10 billion.(4) Because growth and income funds invest in established companies that have been around a long time, they tend to perform predictably in the market. Though their returns aren’t always as high as other funds, they’re what many consider to be a low-risk, stable foundation for your portfolio.
Growth funds are just what they sound like: They’re funds invested in medium to large companies that are growing. Though they tend to fluctuate with the economy, growth funds are considered to be fairly stable overall and often earn higher returns than growth and income funds.
3. Aggressive Growth
Aggressive growth funds are the "wild child" of mutual funds. Made up of stocks from companies with high growth potential (like small tech start-ups or large companies in emerging markets), they’re your chance to take a big risk for a potentially even bigger financial reward.
Did you know plenty of American household names are not American at all? Gerber, Trader Joe’s, Frigidaire appliances, Firestone Tire and Rubber Company, and Holiday Inn are all foreign-owned businesses.(5) By including international funds in your mutual fund portfolio, you can benefit from the success of well-known companies like these.
Related: Are you on track to fund your retirement? Find out your R:IQ with our free tool.
What Costs Come With a Mutual Fund?
Never invest in anything you don’t understand, and understanding mutual fund fees is difficult, even for experienced investors. Mutual funds pass along their operating and other business costs to investors through all sorts of fees and other expenses—things like shareholder fees, operating expenses, front-end load fees, purchase fees, back-end load fees, redemption fees, exchange fees, and account fees.(6)
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Fees are a fact of life when it comes to investing, so your goal is to choose mutual funds that perform well and have reasonable fees. This is exactly why you need a pro in your corner. With experience to back their advice, a good investment professional can help you understand your overall cost and how it will affect your end result. They’ll not only work with you to understand your financial goals, they’ll help you understand those "hidden" fees so you can avoid surprises that could eat away at your nest egg.
How Much Risk Is Involved With Investing in Mutual Funds?
When deciding on a mutual fund, it’s important look at its history and how it’s performed over the last 10 years—not just the last year or two. It can be tempting to get tunnel vision and focus only on funds that brought stellar returns in recent years. Instead, 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?
You’ll also want to understand how the mutual fund has performed compared to other similar funds in the market over long periods of time. Is it keeping up with a good benchmark like the S&P 500, or has it been performing so badly that it’s making even the "worst" funds look good? All in all, to lower your risk, you want to choose a fund that has a long-running track record of strong returns.
You’re not always going to have sunny days when it comes to investing for retirement. There are going to be some good days and there can be some bad days in your funds. But choosing a good mix will help you build a weatherproof retirement that will help you get through those rainy days.
There is no guaranteed, get-rich-quick approach to building wealth. Regardless of how you invest, there’s always going to be some potential for risk. But, by working with an investment professional who can explain your options in plain English, you can make educated decisions on how to minimize your risks—as well as what areas you’re actually going to want to take risks in.
Planning for Your Retirement With Mutual Funds
You don’t have to camp out on the trading floor of the New York Stock Exchange to get smarter about your retirement. Mutual funds are a straightforward affordable way to begin investing for the long haul.
For 20 years, in all types of economic climates, our investing advice has remained the same: Invest in the right mix of mutual funds with a history of strong performance and stick with them over time.
Don’t leave your financial future to chance. Start building your legacy by sitting down with a SmartVestor Pro. You can work with an investing professional as you select your funds, devise a long-term investing strategy, and maintain that strategy whether the stock market is swinging up or down. Your Pro will educate you about which investing options make sense for you, navigating you through the process so you can set real goals that create real results.
Take control of your financial future. Contact a SmartVestor 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.