We’ve been discussing investments these past two weeks here at YMF; talking about how young professionals like you should really consider investing some of your money in the market and what the differences between investing in stocks and mutual funds looks like. If you choose to ignore all my advice this week, you’ll still have to make a decision about the investments in your retirement 401(k) or IRA, so this article is for you. I’m not sure what options your retirement plan has but I’ll explain the options available to me at my job and I think it’s safe to assume they’ll be similar to yours. 

The lazy investors dream: the auto [insert retirement date here] fund.

Mine’s the Fidelity Freedom 2055. When I started working full time in 2012, I was pretty optimistic about my saving abilities. I knew I’d start early and save a lot for my retirement. I figured I’d want to retire in 40-50 years, so I picked a 2055 retirement date fund. After that, the idea is that that’s the only decision I’ll make. The typical retirement investment thinking goes as follows: when we’re younger, we should invest in riskier assets (like stocks) in order to try to gain more reward. The thinking is that we’ve got a long time to work out any ups and downs and gradually build a lot of wealth via these riskier assets. The older and closer to retirement we get, the less risky we want to be. Say when we’re in our late 50s, we’re definitely not going to want to risk as much of our money as we did when we were younger, so we would put our money in bonds and such. And we’re ok with a smaller reward from our less risky assets, as hopefully those years of growth we’ve put behind us has been good to us. The auto [insert retirement date here] fund (as I’m calling it) does this work for you. In the early life of the fund it invests the bulk of the money in stocks (mine invests around 80%). As we and the fund gets older, it’ll shift its investments automatically into less risky investments for us.

This is typically a good bet for us passive investors and we don’t really have to make any decisions at all. As with anything on autopilot, I’d definitely keep tabs on it, ensuring that the fees are randomly getting too high and that the fund’s performance is doing well (mine’s earned a 15% year to date return for me).

Large, Mid and Small Cap Funds – pick your winners!

Another option that all of us have in our retirement options are large/mid/small cap funds. Each of these types of funds will be investing in the stock market, and the types of companies will be dependent on whether it’s a large/mid/small fund. The logic is as follows: A large cap fund will obviously be investing in large companies. The thinking is that these companies have been around a long time, are successful and will continue to be for quite some time. They are less risky because they are already successful but still have room to grow. A small cap fund will obviously invest in smaller companies (still publicly traded, so it’s not like they are mom & pop companies), which carry more risk as they are not proven but have a lot more room to grow. A mid cap fund will be somewhere in between the two. A good portfolio for young professionals will have a good mix of these types of funds. We’re young and can take on more risk, so stocks will make a lot of sense for us at our young age.

Foreign Stocks—travel much?

As if picking stocks in your own country wasn’t hard enough, imagine doing it overseas in a completely different market? Just given the fact that it’s the stock of another country should indicate that it’s a lot riskier. How’s the telecommunications market in Japan? How are pharmaceutical sales in Brazil? These aren’t going to be easy questions for us or even a trained money manager to answer, so these stocks will be inherently riskier. However, just like the British realized back when they had colonies; there is definitely money to be made overseas. Foreign stocks should play a role in your retirement mix, but not a huge one.

Bonds/Income/Treasuries—Well I’m not 60 yet…

These are going to be your lower risk funds that will provide you security but not the reward. Whereas the other types of funds may be paying 10%+, these will be paying 1-perhaps 5% return. I would avoid these if I were you as there’s not much need for them. These are going to be funds that you should invest in when you’re approaching retirement. At this point you’ll have earned enough money to where gains mean much less than security of your money.

The name of the game is diversification!

You may be scratching your head now and saying that you’ll just pick the fund with the highest year to date return and throw all you money in that. Fair enough, hope that works out for you. A good investor though won’t put all their eggs in one basket, they’ll diversify. For me, I put a good chunk in a blended investment fund. I then put a large chunk in a large cap fund, then a foreign stocks fund and finally in a mid cap fund. I don’t see the need to playing it too safe right now, so I stay mostly in stocks. When one fund has a bad day I don’t worry too much because my other funds normally pick up the slack. Little by little with each paycheck contribution and some growth in the market I’m growing my mutual fund.

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