Going Long with Funds
The secrets: Keep your costs low and don't chase hot performers
(MONEY Magazine) – When it comes to investing for the long haul, high-quality stocks are one way to go. But mutual funds can make the job a lot easier and provide pretty much the same return as picking stocks--provided you build your fund portfolio wisely. Here are three options for creating a portfolio that can carry you for three decades or more. GO ON AUTOPILOT Target retirement funds are designed for people looking for a hands-off way to invest for the long term. You choose a fund with a date that corresponds to the year you plan to retire--2020, 2040 or whenever--and voilà! Not only do you get a ready-to-go diversified portfolio with everything from large-cap growth to small-cap value shares (not to mention foreign stocks and bonds), but the fund also automatically ratchets down its risk level as you age by gradually shifting into bonds. And if you stick to target funds offered by cost-conscious firms like Vanguard, T. Rowe Price and Fidelity, you can get this convenient package for less than 1% of assets per year, or as little as 0.2% in the case of Vanguard. STAY ON COURSE Building a portfolio with index funds requires a bit more time and attention, but you reap benefits in many other ways, starting with certainty. Since index funds slavishly follow a market benchmark, you don't have to worry about a fund manager abandoning his usual investing style to chase today's hot sector. That's a huge plus when you're trying to stick to a strategy over many years. Index funds' razor-thin expenses and the fact that they give up little of their gains to taxes make them ideal building blocks for a long-term investing plan. PICK UP A TAILWIND You may be able to juice your returns a bit by adding a few funds whose managers have shown exceptional skill in certain areas of the market. A top value-fund manager, for example, may help your portfolio hold up better during downturns and beat the market over the long run. Be careful, though. Truly superior performance is exceedingly difficult to identify in advance, and you've got to pay up for a manager's expertise. Actively managed funds often charge a half to a full percentage point more than index funds, which is a sizable handicap for even the most talented managers to overcome over long stretches. You'll find choices that offer consistent performance and low fees in the MONEY 65, our recommended list of funds that appears on page 90. TIMELINE WHERE THE MONEY GOES As you get older, take a more conservative tack with your portfolio. NOTE: Cash includes short-term bonds. SOURCE: T. Rowe Price. |
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