But there are a few ways you can reduce the risk of investing so you can sleep a little easier at night. It can be tempting to get tunnel vision and focus only on funds that brought stellar returns in recent years. Instead, take a deep breath, step back, and look at the big picture. All in all, to lower your risk, you want to choose a fund that has a long-running track record of strong returns.
Mutual funds, which are filled with stocks from many different companies, already have a certain level of diversification built into them. And when you add another level of diversification by spreading your investments across those four different mutual fund types mentioned earlier, you lower your risk even more.
There are going to be some good days, and there are going to be some bad days. But choosing a good mix will help you build a weatherproof retirement that will help you get through those rainy days. Just like their name suggests, exchange-traded funds—or ETFs—are basically funds that are traded on an exchange.
They are similar to mutual funds in lots of ways:. But there are some important differences between mutual funds and ETFs —the most obvious one being how they are bought and sold. You see, mutual funds can only be bought and sold at the end of the day after the market closes.
You can also set up automatic payments to buy more shares each month, which is a nice feature for long-term investors. That means the price of an ETF goes up and down throughout the day, and investors can buy or sell them in response to these short-term swings. Mutual funds, which can have stocks from hundreds of different companies, make it easy for investors like you to diversify your portfolio because they have diversification built into them.
Trading single stocks can get expensive because you might end up paying transaction fees for every single stock you buy and sell. Those fees can add up really fast! Mutual funds, on the other hand, make it affordable to invest in a wide range of stocks without those pesky transaction fees. Mutual funds are a straightforward, affordable way to begin investing for the long haul.
No matter what is happening with the stock market, our advice is the same: Invest in the right mix of mutual funds with a history of strong performance, and stick with them over time. You can work with a financial advisor as you select your funds, devise a long-term investing strategy, and stick with that strategy whether the stock market is swinging up or down. Your pro will help make sense of your investing options and walk you through the process so you can set real goals.
Find your SmartVestor Pro today! Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since Millions of people have used our financial advice through 22 books including 12 national bestsellers published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Guided Plans. These risks are often heightened for investments in emerging markets.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. It can be tempting to get tunnel vision and focus only on funds or sectors that brought stellar returns in recent years. Investors just have to remember you never want to put all your eggs in one basket.
It's long-term, and you may want to try to keep your investments as simple and as boring as possible. Before committing to a fund, take a step back and consider the big picture. How has it performed over the past five years? What about the past 10 or 20 years?
Look for mutual funds that stand the test of time and continue to deliver strong long-haul returns. If Dave has said it once, he's said it a hundred times: Never invest in anything you don't understand. No one cares about your future as much as you do, so it's in your best interest to take charge of your own mutual fund education. But sometimes you need a little help with translation. And that's where an investing expert comes in handy.
A good investing professional can help you sort through the lingo and determine whether the mutual funds you think line up with your objectives really do. Be clear about your goals up front to ensure you and your pro are on the same page before you make selections. Remember to take your time and interview several SmartVestor Pros before you make the decision.
You want someone who's been through both boom and bust times in the stock market so they can give you suitable advice in any situation. What if you know a lot about investing, and enjoy researching your options on your own? Do you still need an advisor?
In fact, even Dave has an advisor! Think of your advisor as a coach, yet you call all the shots. You don't have to be an expert in investing lingo to choose the right mutual funds. But a basic understanding of some of the most common terms will help.
Here are a few to get you started:. Asset Allocation: The practice of spreading your investments out diversifying among different types of investments with the goal of minimizing investment risk while making the most of investment growth. Cost: Be sure to understand the fee structure associated with using a financial advisor. A vital part of asset allocation is having more than one type of asset.
As explained earlier, Dave Ramsey suggests that investors hold four mutual funds in their IRA or k. But chances are high that his suggested fund mix might overlap. For example, if you purchase an aggressive growth fund, it may grow to become a growth and income fund. This further reduces the diversification you were trying to create in your portfolio. International funds may also invest in U. Dave suggests that investors use loaded funds; a strategy that means the investor will pay commission to an investment adviser and broker.
As such, you might prefer the no-load funds option. Dave Ramsey has a lot of financial advice from money market accounts to mutual funds. Dave Ramsey. By Saved by the Cents , January 30, Related Articles.
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