The Two Investment Tools You Need to Know About
Investing for retirement is important, but some people might be surprised to know that the IRS actually limits the amount you can contribute to certain retirement funds. Beyond that, there is the added problem of penalties if for any reason you need to withdraw those funds before retirement age (typically 59 ½). So where should you be putting your money? Should you spend hours researching individual stocks and bonds to purchase? You absolutely can if that’s your thing, but personally, I like to have a professional diversify my portfolio for me. Luckily, there are two great investment vehicles to consider when you want to grow your money, but have the flexibility to withdraw funds prior to retirement.
Mutual Funds
Mutual funds are one of the better known investment vehicles. Instead of buying an individual stock or bond, it allows you to purchase an entire portfolio of securities, which can ultimately help to lower the risk that your hard earned money will be lost forever if the market crashes. For many investment companies such as Vanguard, Fidelity, Charles Schwab, etc. this is a large part of their offerings. Their financial advisors select hundreds or even thousands of securities and package them into these funds, and they will typically charge a fee to manage that fund.
What should you look for in a mutual fund? Typically and investment company will grade the level of risk attributed to each fund, which is a great place to start. As a general rule of thumb, the longer you have until retirement, the more risk you can afford. In other words, if you’re in your 30s you might consider a higher risk mutual fund knowing that if something happens to the fund, you have time between now and retirement to try to make up the difference. Additionally, you will want to consider the expense ratio. This is the cost to administer the fund, and the lower the cost the more gain you will be able to pocket at the end of the day. This number is incredibly important to your bottom line. Lastly, you will want to consider any investment minimums. Unlike most ETFs, mutual funds can often have minimum contribution amounts starting around $3,000. If you can’t afford to invest in that now, an ETF might be a better fit.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds, or ETFs, are similar to mutual funds in the sense that they are curated portfolios of stocks and bonds. They are also available through investment companies, but they have some benefits that mutual funds can’t match. For instance, ETFs are considered to be more liquid since their price fluctuates throughout the day as most stocks do on the market exchange. Essentially, if you see that an ETF is performing well and you decide to sell it, you will get whatever the market price was at that time for the sale. Alternatively, mutual funds are only valued once a day, and the price you saw that day when you decided to sell may not be the same as the actual sale price one the fund is finally sold at the end of that day. Additionally, ETFs tend to have lower expense ratios which is a huge benefit and one of the main reasons ETFs tend to be touted by financial planners as superior to mutual funds. A downside, however, is that you are typically unable to automate investments into an ETF whereas that is highly encouraged when it comes to mutual funds.
Opening a Fund
You can open a mutual fund or ETF today through many investment companies. You can check out Vanguard, Fidelity, Charles Schwab, Merrill Lynch, even Betterment to determine which company might be the best fit for you, but each of these should allow you to open accounts online that very day should you wish to. The beauty of these funds is that you can set it and forget it. Choose your investments and watch your money grow knowing that professionals are benchmarking or rebalancing your investments for you.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.