So how do I choose what to invest in?
For most of you, you don’t have to worry too much about choosing your investments yourself – chances are, your 401k/403b will come with a financial advisor who manages your account for a small fee, and they can help you figure out how to structure your investment portfolio. You can usually also open an IRA with them and they can manage that as well. This section is just here to help you learn about some of the basics so that you can have an informed conversation with them.
Choosing your investments requires a bit of self-awareness and reflection. In order to figure out what to invest in, you have to consider a few things:
#1 How close am I to needing this money?
#2: Would I rather have a less growth potential but less fluctuation in my account balance or more growth potential and more fluctuation?
Your advisor will probably have some sort of questionnaire to help guide you through this part; however, you’ll want to give it some consideration ahead of time.
Some different investment options:
*In this section, “funds” refers to both ETFs and mutual funds.*
Target date funds: Target date funds are funds that invest in both stocks and bonds. Each fund offers many different dates that are meant to be your target date for retirement. For example, if you are planning to retire in 2060, you would invest in a 2060 target date fund. These funds automatically adjust the allocation based on how close the target date is. In essence, they do all of the work for you, but you’ll probably will leave some growth on the table because they’re fairly conservative and won’t use dividend funds or covered call funds if interest rates are low. However, they’re better than leaving your money in cash for your whole career or losing it all by buying the wrong stock.
Equity funds: Equity funds invest in stocks with the goal of growing your money. The flip side of this is that they also tend to have the most fluctuation and rely on your money remaining invested to grow. Some offer dividend payouts, but the main goal usually is growth potential, not the dividends. Equity funds are usually best for money that you’re not planning to use for a while, such as when you’re young and a long way from retiring.
Bond funds: Bond funds invest in bonds and pay out the interest that is received from the bonds. The prices and returns of bond funds will fluctuate, but payouts are usually more predictable than some of the other funds. Their payouts and growth potential are the highest when interest rates are high, and the lowest when interest rates are low.
Dividend funds: Dividend funds invest in stocks that pay dividends. Dividend funds tend to offer a better payout than bonds when interest rates are low, but a worse payout when interest rates are high. The payout tends to vary more than bond funds because companies can adjust their dividends at will, whereas bonds come with a specified interest payment. Depending on the state of the economy, this can be a good or a bad thing.
At the moment, my portfolio is entirely invested in S&P 500 funds (ETFs in my IRA, mutual funds in my 401k). I’m not planning to use that money for a few decades, so I am comfortable with having it invested for the long-haul. My logic for centering my retirement investments on the S&P 500 is that it allows me to invest in many different companies and industries at once. If one company or industry struggles, there are plenty of others that can help balance things out a bit. Investing in one company may seem appealing, but to me, running the risk of losing my entire investment is more risk than I am willing to take. It is possible that the entire US economy goes belly up and the S&P 500 becomes worthless. However, in that scenario, I’m guessing that I’ll have bigger fish to fry than how my retirement accounts are faring. As I get closer to retiring, I’ll begin shifting my money out of equity-based funds and into income-based funds like dividend and bond funds so that I have more cash available for withdrawals.
Seaotter Fitness 