We all know the old saying, “Don’t put all your eggs in one basket.” The moral of that saying is diversification. When it comes to investing for your retirement , diversification is crucial. Without it, there is simply too much risk involved. For instance, had you not rebalanced your portfolio at least annually, you probably found yourself in a lot worse shape than your peers. That’s because over the last decade banks and financial stocks led the way to an all time high in October of 2007, so your portfolio probably looked great.
Right up until the stock market fell to it’s knees in September of 2008 when Lehman Brothers, an investment banking firm, went belly up and the domino effect was tremendous. The banking system as we knew it was about to fail, and those bank stocks were about to lead the way down, and hard. With proper diversification and rebalancing, losses were hedged by not having too much invested in one sector. Everyone lost in 2008, but some more than others.
Mutual funds each have their own fund manager who is responsible for researching, buying and selling stocks on a daily basis to ensure that their mutual fund is allocated accordingly. These fund managers have specific goals for their funds. Some funds are for more aggressive investors, others are for the conservative investor.
If you are less of a risk taker, a mutual fund that is in line with your goals are ones that invest into larger, less risky companies that are well established that also pay a dividend. Some examples would be Coca-Cola (KO), Microsoft (MSFT), and Wal-Mart (WMT.) A more aggressive approach would be to invest in mutual funds that buy smaller, less known companies that have more risk, but possibly more reward. A lot of these companies are not very well known, hence a fund manager.
The bottom line to owning mutual funds is to do some research, find out what the funds objectives are, and pick one that suits you. Call your Financial Advisor, ask questions, that’s what they get paid for. Mutual fund companies also have fund information on their websites. Mutual funds are the only way to efficiently have proper diversification. Mutual funds are the safest way to retirement, but that doesn’t mean you can forget about them. So keep an eye on your portfolio, even if it is going up.