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Learning how to invest requires time and energy. Fortunately, mutual funds have simplified investing for the normal investor. Within the past few years the process of selecting mutual funds has been made easier. Target retirement funds are now available through major mutual fund families, and are provided by many 401(k) plans also.
The target retirement fund advantage: one-stop shopping, virtually no investment knowledge or experience necessary. Just buy and hold, pay your fees/expenses and maybe sales charges. Professional money managers handle all the investment decisions in line with the retirement year you pick. Just select the target fund closest to the year of your planned, or past, retirement. Example: target retirement 2030 fund would be appropriate in case you plan to retire within two or 3 years of the year 2030.
Once invested you never need to make another investment decision or worry about how you can invest. As you approach retirement and become more conservative, so does your investment portfolio.
Target retirement funds are generally mutual funds that simply invest in other stock funds, bond funds, and money market funds of mouse click the following article exact same mutual fund company. Target funds dated far into the future, like target 2040 or 2050, will be heavily invested in stock funds for many years to come. If you invest in a target 2020 fund today, your hard earned money will be invested primarily in stock funds and bond funds, mostly stock funds the first couple of years.
In the event you are already retired and don't know-how to invest, you could consider putting your nest egg into the safest of these funds, the retirement income fund. These target funds invest about 80% of your money in safer income-producing investments like bond funds and money market funds to supply you with income in retirement.
It doesn't get much easier. Plus, you may save thousands on mutual fund sales charges by buying one of these funds through a no-load mutual fund family as opposed to through an investment professional.
Target funds will be the easy way to invest in a professionally managed retirement portfolio targeted to your station in life. The idea behind these investments: young people need growth and can also accept higher risk, middle aged investors will accept moderate risk for higher-than-average returns, and older folks will accept some risk to earn a larger degree of income in retirement.
The problem is: in the event that you don't understand investment basics or the best way to invest according to your personal risk tolerance, you could select a target fund that is not really ideal for you. Put simply, the same shoe will not fit all investors of a given category. Some young adults are conservative, and lots of retired folks are uncomfortable taking even a small risk with their retirement nest egg.
Like with any other mutual fund, you will need to understand the nature of the investments held in a target retirement fund portfolio. Virtually any of these funds can lose money, and in 2008 a large proportion of them did. Why? As these funds have market risk, and 2008 was a horrible year for the stock-market. Let's take a closer look-at the risk involved.
If you plan to retire in 2040 and invest in a target retirement 2040 fund, 90% or maybe more of your assets will be invested in stocks. Should the stock market drops 40% as it did recently, expect that you're going to lose almost 40% of your investment value. A 2050 target fund may very well be 95% invested in stocks.
If you plan to retire in 10 or twenty years, beware that a 2020 target retirement fund will be about 60% invested in stocks and also a 2030 fund about 80%. In the event that you are uneasy with this risk, consider putting all or some of your retirement assets in to a safer target fund. For example, a 2010 fund bought today would only be about 25% invested in stock funds.