Investing Long Term In Mutual Funds
Remember that there are no financial investments that can guarantee a return short of a government bond or bank certificate of deposit. In the case of the former the worth of the bond depends on the integrity of the government. In the case of the latter the CD depends on the continued existence of the bank. For stocks and stock mutual funds, the worth of a share depends on whether the company continues to be solvent.
Advisors tout the stock market for bringing returns of 10% on average but this praise masks a complicated picture. In truth, the stock market has yielded positive returns only about half the years in existence. The other half have been large busts. Together the average comes out to about 10%. Investors can see for themselves these statistics by using online tools to compare mutual funds.
Investors pick up two pieces of knowledge from this. Those who are in the investing game for the long term are likely to walk away winners from investing in stock market mutual funds. Those who are in the game for a much shorter time, experience substantial risk.
What does long and short term mean exactly? For a good rule of thumb, 5 years is considered short term when it comes to stock markets. For people who are near retirement, investing in a volatile mutual fund is not advised. A more stable investment like a bond fund is probably a better choice.
Younger investments in their 30s and 40s will benefit from having time to ride out the fluctuations and volatility. The suggestion is that they keep anywhere from 60% to 80% of their retirement assets in stocks. But as they age, expect them to start adjusting this portfolio mix.
Even so, younger investments must learn patience and a certain kind of fearlessness when the stock market takes a plunge. It is often inadvisable to try to time the market by shifting money out suddenly when the broader market has dropped. It may return rapidly without giving the investor a chance to buy back in.
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