I am thinking about open an ROTH IRA account.
There are so many different names to call these funds.
What are those?
I know target date fund is one that I can put in when is my desired retirement date and the broker will invest accordingly.
Than what is Index fund? What is the different between those target date fund and mutual fund?
thank you Hi, Cindy,
"Mutual fund" is a very broad term. It refers to any form of security which represents "pooled" funds from investors. Mutual funds can invest in just about anything: gold, growth stocks, junk bonds, and so on.
If you open up an account, they take your money and use it to buy more of the security they specialize in.
Most mutual funds are actively managed. That is, there's a manager paid big bucks (by you!) to buy and sell the securities that the mutual fund invests in.
Frankly, actively managed mutual funds are horribly overhyped by the financial media, but are still widely used by investors who don't want to take the risk of choosing investments on their own.
Losing money is not so painful if you can blame someone else :)
All that buying and selling is an expense that comes out of your pocket. The mutual fund manager gets a better commission than you or I could, but the buying and selling is not free.
Also, numerous academic studies have proven that mutual fund managers are NOT -- in the long term -- any better at picking winners than random chance.
On the whole, in the long term, mutual fund managers trail the market by 1-2% per year.
If a mutual fund manager has a good year this year, chances are they'll be less than average next year.
Years ago, a smart mutual fund company named Vanguard decided that if mutual fund managers couldn't beat the market, why not just offer investors the chance to MEET the market?
In the long run, the stock market does go up.
So Vanguard started the first index mutual fund -- it's designed the match the performance of the S&P 500 Index. The Standard & Poors 500 Index is a list of the top 500 companies in the US. Therefore, a fund matching it is pretty much matching the overall performance of the US stock market.
Again, that's up and down, but up in the long run.
Therefore, I highly advise you to invest only in an index mutual fund.
A target date fund is going to invest your money in a combination of stocks and bonds.
The younger you are, the more of your portfolio they'll put into stocks. As you grow older, they'll move some stock money into bonds.
But you'll incur a lot of expenses through all this buying and selling.
You can easily do the same thing yourself by putting 90% of your
Roth IRA into an S&P 500 index fund, and the other 10% into TIPS -- Treasury Inflation Protection Securities. These are government bonds that are guaranteed to grow with inflation.
Do make sure you keep TIPS in an IRA though. There're bad tax consequences if you keep them outside of an IRA.
Over the years you can start buying more TIPs and less shares of the index fund.
Lots of financial advisers spout rules of thumb and show you asset allocation pie charts, and so on -- but remember that there's no absolutely known optimum way to invest as you get older.
There're a lot of individual variables (such as you much you make in your job or business). Plus, none of the advisers knows the future.
All their projections are based on past performance, yet the financial markets are somewhat new with every day (we've never before a stock market plunge due to subprime mortgage lending, for example. You won't find the current situation in any investing books.) Mutual Fund - a group of stocks, that a professional fund manager picks to try to beat the market. Basically, he's a professional day-trader with a $100,000,000 to trade with.
Index Fund - a mutual fund, specifically designed to copy one of the major indexes (Dow Jones Industrials, or Nasdaq, or S&P 500 index).
Target Fund - a mutual fund, specifically designed so that it takes bigger risks now, and smaller risks as you get near the target year (your retirment)
Before investing in ANYTHING, make sure you understand it 100%. It's your money. A mutual fund is a pool of money invested together. Despite what a previous poster thinks, they don't day trade. They're too big. I agree with the idea that "professionals" can beat the market. This has been disprove so many times, I'm not going into it here.
An index fund is a specialized mutual fund that tracks an index. There are hundreds of them. Some track the big S&P 500. Others track smaller, industry specific of country specific indexes created by index statistic publishers. I like these because they eliminate the high paid stock picker who runs up expenses without adding value.
A target fund invests in things of decreasing volatility as the target date comes near. Sometimes, this means bonds that will mature into cash at the target time. Good isea for marketing, but is this really good for the consumer? |
