For those of you who invest, or would like to start, the end of the year is a good time to take a look at your portfolio and figure out whether you want to shift things around in the near future. If you have a 401k or other retirement savings vehicle, this is absolutely something you should be doing at least once a year (if not more). Take a look at the funds you have your money going towards and ask yourself the following questions:
1) How did they do this year? Are they making money or losing money?
2) Are the riskier funds providing a larger return that the less risky options?
3) Am I diversified enough, for my age, income level, and how much I would like to save by retirement?
Most financial analysts would recommend investing a bit more aggressively while you're young, single, and have no kids. This is definitely the approach I take. What dose investing aggressively mean? Essentially, it's putting a larger percentage of your money in more risky investments (i.e. stocks are more risky than bonds).
Most 401k's (I've never seen one that doesn't) invest in mutual funds...which appear to you as these names you have never heard...like, American Funds Mutual Fund. Half the time, I don't know what they are either...so the thing I pay the most attention to is whether the funds I pick are fixed income, large cap, mid-cap, or small cap:
(in order from lowest to highest risk and return)
1) Fixed Income: these funds invest in bonds, which we should know are much less risky than stocks. Because of their very small risk, the return is also very small. If you're young, your retirement portfolio should not include a ton of fixed income funds. As you get older, it should include more.
2) Large-cap: These funds include companies with a market capitalization of about $8 billion or more. These are your very large companies who have been around for a while and have strength in the market. They're growth is pretty steady and therefore their returns are as well. These mutual funds will present less risk than the other two.
3) Mid-cap: This is the most popular choice for a lot of people because it represents the "middle-of-the-road" funds. The market cap for these funds are between $1B and $8B. They include companies that may offer a bit more return that a large cap because they're slightly smaller, a tiny bit newer, and a little more risky. I read in an article, that you can compare a mid-cap fund to a mid-size vehicle. It offers some of the benefits of the compact car (small-cap fund) without being as massive as an SUV (large-cap fund). I like this analogy. hehe.
4) Small-cap: This is where the money is at! lol. This is the most risky of the four options. These are new, baby, start up companies, with market caps below $1B. What does being new mean? The growth of these puppies can sky rocket (which means nice big returns for us), but due to their limited history, the financials are not as strong and therefore they can easily fail. So this is where you have the biggest risk but also the biggest return (or biggest loss).
The percentage of your money that you invest in the different types is totally up to you. I tend to be okay with taking on more risk while I'm living footloose and fancy free, so I put almost nothing in fixed income, very little in large cap, maybe about 30% in mid cap and about half in small cap funds.
I will say that the more risky you go, the more often you should probably check your portfolio. Don't go moving things around every month...funds will have peaks and valleys, but you don't want to have 50% of your investment going to a small cap fund that's losing you a lot more money than you'd like for years on end. Alternatively, when you see a small cap getting you big returns, you might want to shift more money there while it's riding the big return wave.
The key here is that it's important to monitor what your retirement savings are doing (especially in this economy). You don't have to fully understand every little thing about the funds. It just takes a little common sense (and blog reading) to know what looks good and what looks bad.
Found this for the really cool kids: The Best Mutual Funds and Exchange Traded Funds
Happy Investing!
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