A lot of people are concerned about their retirement accounts these days. I keep telling myself that I’m getting a great deal, and that in a few years when the stock market rebounds, I should be in really good shape. But that doesn’t help some folks, and many are even more nervous about how they should choose investments for their retirement accounts. This is understandable.
I recently read an interesting post at the Oblivious Investor that points out that the way most people choose mutual funds for their retirement accounts is by historical return. While looking at a fund’s history may give you some comfort, the fact of the matter is that — say it with me now — “Past returns are not a guarantee of future results.” Instead of staking your future on past returns, Mike, the Oblivious Investor, recommends these 4 tips for selecting mutual funds for your retirement account:
- Make sure the asset allocation in the fund complements your overall portfolio. I think Mike makes a really good point here. You need to figure out what your own goals are, and create an overall financial and investing plan that meets your needs. Your retirement account should fit into that plan.
- Look at expense ratios. Figure out how much of what you yield every year goes to expenses. You want to keep more of your money in your pocket.
- Choose mutual funds with low turnover. You don’t want a fund that keeps trading out what’s in there. That means that the manager is trying to time the market. Look for funds that have long-term staying power. Plus, managers that constantly switch out stocks are accumulating costs for selling the stock and buying a new one to replace it in the fund.
- Avoid huge actively-managed funds. If the fund is too big, Mike points out, it is likely to be more like an index fund with a really high cost. In this case, you’re better off just investing in an index fund on your own. It’s be cheaper.
It can be a daunting task to select any investment for your retirement account. Indeed, if you are concerned about it, you might try consulting with a fee-based financial planner who can help you create an asset allocation with the right mix for your individual situation. It costs a little up front, but it could be more than worth it in the long run.