One way to make fund investing simple is to stick with index funds. Index funds buy every stock or bond that’s part of a given index and hold those assets indefinitely.
Because an index fund doesn’t have to pay managers and analysts to study securities, the funds are cheap. The typical domestic index fund charges just 0.71 percent of assets in fees each year, compared with 1.41 percent for the average actively managed U.S. stock fund, according to Morningstar. And because the funds do little buying and selling, trading costs are low, too.
Primarily because of their expense advantage, the performance of index funds is competitive with the best actively managed mutual funds. In fact, over the long haul, index funds beat most comparable actively run funds, although managed funds prevail from time to time.
You can find index funds for nearly every category of stock and bond. You’ll find index funds in both the mutual fund format and among exchange-traded funds. Just pick the index you want to mirror and buy the cheapest fund that copies that benchmark.
Pick your target. If you crave simplicity, you’ll love target-date funds, which divvy up your assets among stocks, bonds, cash and, sometimes, commodities based solely on the date that you’re likely to need your money.
Because you probably have more than one goal, you shouldn’t consider a target fund to be a one-fund answer to all of your investment needs. Your portfolio should also include a cash account for your emergency money, and maybe a 529 plan for college savings. But for retirement savings, a target fund can be a simple, set-it-and-forget-it option.
Where should you go for target funds? We like the offerings of all three of the nation’s biggest no-load fund companies: Fidelity, T. Rowe Price and Vanguard. But each approaches asset allocation somewhat differently.
Price is the most aggressive, holding roughly 55 percent of assets in stocks at the target date. Price believes that growth investments are more likely than income investments to beat the rate of inflation over time, so these funds remain relatively stock-heavy throughout retirement. Vanguard and Fidelity both have about half of their target funds’ assets in stocks at retirement but shift you into bond-heavy income funds after a set number of years post-retirement -- seven in the case of Vanguard, 15 in the case of Fidelity.
The right mix for you will depend on your investment style. If you’re conservative, pick Vanguard; if you’re aggressive, choose Price; if you’re in the middle, go with Fidelity.
Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit www.Kiplinger.com.
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