I'm 23 years old and would like to retire when i reach 50-60. Can somebody please take a look at my available investments and guide me to which ones i should invest in? 100% in one or smaller percentages in multiple choices. Thank you in advance.
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John W
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The funds can be separated into the following categories:
- index funds
- bond funds
- balanced funds
- target funds
The index funds are 100% invested in a slate of stocks and there will be various index funds according to types of companies selected, either by size of companies ( large cap, mid cap, small cap ), by industry or whether it's foreign or domestic. Despite your inclination to select higher risk funds in hopes of greater returns or play with selecting sectors on the belief that you can select which industry will boom next, your best bet is always a total market index.
The Bond funds are 100% invested in a slate of bonds. There are variations of bond funds from municipal bonds, bonds from large corporations that are unlikely to default or bonds from corporations that may default ( junk bonds ). Again, it's best to stay with investment grade bonds which is grade 'BBB' bonds.
Note that both index and bond funds have very low maintenance fees as they are simply invested by set rules rather than by the judgement of a fund manager.
A balanced fund is based on portfolio balancing. If you model a portfolio as being a balanced between something that varies randomly in a random walk and cash which doesn't change at all, your best return is by rebalancing the portfolio periodically to 50/50, this effectively buys low and sells high ( Claude Shannon at MIT ). If you extend this concept to stocks and bonds, you would target slightly less stock and slightly more in bonds. Ben Graham said in his book "The Intelligent Investor" that the optimal balance is 45% equity and 55% bonds but to never go below 25% equity and never above 80% equity. Markowitz's efficient frontier says that 25% equity is the safest, safer than 100% bonds; he also says that 50/50 has the same risk as 100% bonds but much better returns and though returns do increase with increased risks, they do so in ever diminishing amounts. Markowitz has a tangential method of selecting the optimal proportion from the interest free rate. Balanced funds will be conservative ( 25% equity ), moderate ( 50/50 ) or aggressive ( > 80% equity ). For a lump sum investment, the best selection is moderate, for asset preservation the best selection is conservative. The rationale for more aggressive portfolios will be discussed with the targeted funds.
The general advice is that you should be more aggressive when young and conservative as you retire. Often people will hear of the rule of thumb to take 100 and minus your age to determine the percentage you should have invested in stocks versus bonds but there is actually a reason for the variation and it has to do with your future contributions to your portfolio. If you dedicate yourself to depositing a certain amount into your portfolio every month, that would be the same as owning a bond that would have such a coupon payment each month so you already have a substantial "bond" holding when you are young and hence can invest more aggressively. You can even calculate the present value of your future contributions if you had a reasonable market rate of return ( the corporate bond yield of your employer would be a good rate as your job is only as good as the fortunes of your employer ). For example, depositing $466 a month ( enough to max out your IRA's ) for 37 years ( age 23 to 60 ) and using a market rate of return of 7% per annum would give a present value of ( $466 / 1.07^( 1 / 12 ) ) * ( 1 - 1 / 1.07^37 ) / ( 1 - 1 / 1.07^( 1 / 12 ) ) = $75,674.93 so your commitment to make that monthly $466 deposit for 23 years has a present day value of $75 grand and you can invest aggressively till you've reached the optimal portfolio balance point, however it would still be wise to follow Ben Graham's advice of not exceeding 80% equity in the portfolio itself. The Targeted funds manage the portfolios for the respective retirement dates and are usually based on starting to invest when you are 20 years old. They're usually unclear on how they determine the portfolio balance and it's likely no different than the linear rule of thumb method.
Balanced funds and target funds have the highest fees, with targeted funds having the highest. If you are prepared to adjust your contributions once a year, it would be better to select an overall market index fund and a bond fund but if you don't understand what you are doing, a balanced fund or a targeted fund would be a better choice.
The Oracle of Omigod
You can go to morningstar.com and research your choices. There is no need to buy bunches of mutual funds because they are already very diversified. Target funds seem to underperform other types. You do not need to be too conservative because you are young. Do not lose your nerve when stocks and funds go down. There is no mystery as to why their prices fluctuate. Businesses are not in business to lose money so If the fund has chosen carefully the price will go up over the long term.
I would look at Amer. Cent Mid Cap, Black Rock Small Cap, Lod Abbott, T Rowe Price Equity Income, Vanguard Mid Cap, Vanguard Small Cap.