| Mutual funds are an excellent investment vehicle | | | | greater the return - bonds and money market |
| for medium and long term investment strategies, | | | | accounts are very low risk, but very low return. |
| but there's a bewildering array of them, ratings of | | | | Growth funds have higher risks (but still less than |
| them, derivatives based on them, and a highly | | | | picking individual stocks), while wealth preservation |
| complicated jargon involved. Even more telling, the | | | | funds are useful for keeping a balance. |
| people you're most likely to talk to about them | | | | As you mature, your mix of funds in an |
| (your investment broker) are people who get paid | | | | investment portfolio should change. In your 20s |
| commissions to recommend funds to you. While | | | | and 30s, you're almost always better off with a |
| we're not going to impugn an investment broker's | | | | mix of growth funds and wealth preservation |
| motives (after all, he wants repeat business to | | | | funds, with a modest amount of bond funds. The |
| keep earning those commissions) there are some | | | | reasoning behind this is that your retirement is a |
| questions and statements you need to make to | | | | good forty years away, and for the last 130 |
| ensure that the mutual funds you buy meet the | | | | years, over a decade long period, the stock |
| aims you need. Its called Mutual Fund Suitability | | | | market has outperformed bonds and money |
| Compliance - matching mutual funds to your | | | | market and savings accounts 85% of the time - |
| investing needs. | | | | and over 96% of the time when compared over |
| The first should be pro forma - you and your | | | | a twenty year span. So, with a long time horizon, |
| investment adviser should talk about your | | | | a growth fund gives you the maximum return on |
| investment goals, whether they're wealth | | | | investment; as your earning potential increases |
| preservation, revenue generation, or managed | | | | with time (due to promotions and upgrading your |
| growth. Wealth preservation is buying funds | | | | career), this will also insulate you from market |
| loaded in stocks that are comparatively | | | | volatility. Your money market account is your |
| non-volatile; examples are Proctor and Gamble, or | | | | "oops" account - use it to cover emergency |
| Archer Midlands. These are stocks that will | | | | expenses, or to accumulate funds for your house. |
| increase over time (generally beating inflation by a | | | | As you hit your 40s, and start hitting your |
| few points). A growth-oriented fund is one that | | | | maximum earning potential, the mix of funds |
| picks stocks with the potential for significant | | | | should shift from growth-oriented funds to wealth |
| increases in the value of the stock over time. | | | | preservation funds, while slightly increasing the |
| Examples of stocks in this sector would be | | | | holdings socked away in money market and bond |
| Google or other new businesses just starting out, | | | | funds. |
| or businesses that have otherwise created a new | | | | As retirement nears, the ratio should shift again - |
| market. Revenue generation funds are bond funds | | | | more from wealth preservation to bonds to |
| (or just buying bonds), or money market funds - | | | | generate a regular income stream without crippling |
| these give a regular payout every month, but | | | | your growth rate. You'll still want some growth |
| don't have the best return rate. | | | | funds in there to make sure that your wealth will |
| What differentiates these three types of | | | | remain there through the rest of your retirement. |
| investment is the degree of risk undertaken by | | | | When looking at fund suitability, be sure to talk |
| the investor. In general, the higher the risk, the | | | | this over with your financial adviser. |