Many of those employed have access to 401K/IRA retirement plans that incentivize savings through tax deductions and corporate matches. Perhaps you are self-employed (or simply a person who experiences decision paralysis when it comes to stock picking) and prefer the ease of Steady Eddie mutual funds, which are by nature diversified. Fabulous, you are part of a very large club: 46.4% of households in 2019 owned mutual funds; passive management now accounts for 45% of all assets for U.S. stock-based funds, an increase of 25% from ten years ago. If so many Americans prefer to set-it-and-forget-it for retirement savings, how does one choose among the vast sea of mutual fund options? The answer is actually quite simple.
Select Vanguard or another low expense ratio % (fee) fund
Vanguard is practically a co-op business, where their management fees can be as low as .05% (5 basis points… basically dust). In the long term game of passive managed mutual funds, you want to capture as much return as possible for those compound gains, as early contributions are greatly magnified when you start to approach retirement age (and you’ll thank your younger self). Take a fund like Vanguard’s Growth Index Admiral (VIGAX), which has returned an astounding 345% over the last ten years. In the last five years the returns have averaged 21.68% annually, so let’s do a theoretical experiment: start with $10,000 and add a $300 monthly contribution within the VIGAX fund. After five years of monthly compound growth that amount is $61,295. If the annualized returns trajectory continues, it becomes $211,487 in 10 years; $1,938,897 in 20 years.
Make sure the fund includes a lot of tech companies
Clearly the world is becoming hardwired together, with tech serving as the primary conduit for information/data and business revenue. If you go to a research website, like Yahoo Finance, and plug in a mutual fund symbol you should be able to pull up the top 10 holdings when you hit the “Details” tab. For our theoretical case study of VIGAX, their top ten holdings are Apple, Microsoft, Amazon, Facebook, Tesla, Alphabet class A (Google), Alphabet class C (Google), Visa, NVIDIA and Home Depot. It’s a safe bet that these companies are going to continue to be major players in the future, and why you should certainly choose a mutual fund heavy in tech.
Morningstar
Is your gold standard for researching potential mutual funds to invest in. Their free app is especially useful, as you simply plug in the stock symbol and you’ll get the quick take on what is of most interest: 3yr Return; 5yr Return; Expense Ratio %. Comparing the 3yr and 5yr numbers lets you know that the annualized returns are consistent and a good indicator for future growth. Expense Ratio % was covered earlier: basically you want to keep as much of your investment dollars as possible so they continue to work for you. You have plenty of options where to invest your retirement money. If you are going the mutual fund route, you might as well pick the one that is going to perform the best for you. And most importantly, stick with it through all magnitudes of market booms and corrections. Dollar-cost averaging is your good friend.
“If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.” –Jim Rohn