Wednesday, May 09, 2007

Retirement Question from NCN

Since this question was asked over at No Credit Needed, I figured I'd take a crack at it. Please note, I am not a financial advisor and I don't play one on T.V. -- any advice/ideas that are presented here is solely the opinion of the author. Please do your own research/consult your own accountant/financial adviser before making any decisions based on this information.

NCN asks: "Should I invest my retirement funds in ETFs, Mutual Funds, Bonds, or Individual Stocks? Depending on your answer, what should the proper "mix" be?"

In general, I would rule out Individual Stocks for a retirement fund. Retirement funds in general are long-term. And most of the time, if you are getting a stock, it is because you are thinking it will go up over the short or medium term. So buying individual stocks seems a little wierd to me for retirement planning.

So, that limits it back to ETFs, Mutual Funds, and Bonds. Again, I would avoid individual bonds and instead focus on a bond fund or ETF that represents a basket of bonds for the sake of diversification.

When it comes to picking Mutual Funds or ETFs, it would depend on the retirement vehicle I was using and my investment style. If you do a 401k, 403b, it is likely that some sort of low cost mutual fund is the best option for you if you are concerned with growth with low fees. If you are investing in large chunks once or twice or three times per year, I'd go with a low cost ETF. Funds and ETFs are available for both stocks and bonds.

Picking the right mix is a question of how much money you have and how much you plan to invest in the future and how long you intend to leave the money alone before retiring.

If you are in your 20s or 30s, you likely have at least 30 years until retirement and you are probably going to want to do somewhere about 80% stocks and 20% bonds. In your forties and fifties, it might be more like 70/30 and then 60/40 when you are in your sixties. All of these numbers are rough and can be adjusted slightly depending on risk tolerance.

In addition to having the right mix of stocks/bonds, it might make sense to consider other types of diversification. Other investments like REITs or treasuries or metals might be nice investments for small portions of your portfolio (if you have a large retirement account). And don't forget to make sure that your investing is split up among different types of bonds and stocks.

You don't want to put 100% of your stock/mutual fund portion into a single mutual fund that invests in small cap, for example. This might make your retirement fund way too volitile and risky. Instead split it up somewhat between funds that handle small, mid, and large cap as well as international/emerging markets. If that sounds too confusing, you might consider an ETF or Fund like VTI by vanguard which is an ETF/Mutual fund that automatically diversifies the amount of money invested among the entire stock market. This doesn't deal with the emerging market/international issue much, but beats having to dissect the funds yourself if it is not your favorite thing to do.

Anyway, those are my off the cuff thoughts. Hope it helps.

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