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The decision to invest in building long-term prosperity is made difficult by the abundance of choices. How Many Funds Should You Own To Save US Investors For Retirement?
“Ideally, you should be able to count your mutual funds with your fingers on your hands,” said James H. Lee, certified financial planner and founder of Delaware-based investment advisory firm StratFI.
We asked financial advisors to answer some common questions about choosing funds, such as: B. Mutual funds, index funds and exchange traded funds to build a retirement provision portfolio.
Why are funds for retirement provision preferred?
While it is possible to build a diversified portfolio by buying stocks or bonds of individual companies, most investors do not have the time, experience, or money to build a broad portfolio on their own. Buying fund shares can be an inexpensive way to invest with immediate diversification.
“When you build your own portfolio, you can be overweight in certain industries, certain themes, and certain investment styles,” says Lee. “Mutual funds are a great way to easily diversify and spread risk.”
“The first thing to consider is when [financial advisors] Say “funds”, there are usually two types that we are referring to: Investment funds and exchange-traded funds, “said Scott Schleicher, senior financial advisor at Personal Capital, an online financial planning company.
These funds come in many flavors, but in general, mutual funds can be actively managed – to outperform average market returns – or follow an index like the S&P 500. In this case the fund rises and falls like the index. Funds that track an index are referred to as Index funds. A close relative of index funds are ETFs.
“ETFs Most of them follow an index, are usually cheaper, more tax-efficient and, as the name suggests, can be traded like a share on a stock exchange all day, “says Schleicher.
Should I put all of my money in a mutual fund?
That depends on the fund.
“Sometimes it is enough to have just one fund. Balanced funds and funds as of the reporting date are fully diversified and designed to manage risk,” says Lee. “Alternatively, you could just have a fund when you’re just starting out.”
Target funds are a type of mutual fund designed as a “one and done” option and geared towards retirement planning. These funds – also known as life cycle or target annuity funds – automatically make portfolio adjustments to become more conservative the closer you get to retirement age.
If you are contributing to a 401 (k) retirement plan through your employer, there is a good chance you are investing in these types of funds. A 2020 report by the investment company Vanguard shows that 78% of participants in pension plans it manages contribute to a fund with a reference date and 54% only use funds with a reference date for investments.
How many funds make an ideal portfolio? Can I Buy Too Many?
The question is less about the number of funds you should use for retirement planning and more about the range of funds you need to diversify appropriately.
For example, robo-advisors – online investment firms that create automated portfolios for investors – typically use at least eight to ten ETFs to diversify each client’s account, research by NerdWallet shows.
Each ETF contributes to the overall portfolio by focusing on a specific asset class. Common fund investments include US stocks by company size (e.g., large, medium, and small public companies), stocks of international companies in developed or developing countries, and pension funds that hold US government, corporate, or municipal bonds.
Understanding what’s under the hood of your existing funds and how new fund purchases can increase your exposure to new asset classes is critical. “For example, you could hold three ETFs, all of which are partially comprised of US large-cap tech stocks, potentially overexposing that area,” says Schleicher.
“Just watch out for any overlap between your funds,” says Lee. “If you’re not careful, you may be less diversified than you think.”