When you talk about diversifying your investments across four kinds of mutual funds, which kinds do you have in mind?
Great question! First, let’s define a mutual fund. It’s a group of stocks (pieces of ownership) from different companies bundled together, sort of like you bundle Internet, cable and phone service. Here are the four general types of mutual funds I’m referring to when I talk about diversifying, or putting your financial eggs in different baskets:
Growth and Income: These mutual funds bundle together stocks from larger, more established companies. The funds’ goal is to earn money without too much risk, so they’re the most predictable.
Growth: As the name implies, the funds are made up of stocks from growing companies. These are the middle-of-the-road funds. They typically earn more money than growth and income funds, but less money than aggressive growth funds.
Aggressive Growth: These funds have the highest risk but also the highest reward. The stocks come from companies that have a great growth potential, but they’re also less established and less stable. Think of these funds like a teenager’s emotions: They could swing up and down widely—even in the same day!
International: Yep, these funds are made up of stocks from companies around the world but outside the country you’re living in. This kind of fund allows you take advantage of the growth of other global economies.
Now, you’ll also hear the word “cap” next to these categories, like “large cap growth fund.” “Cap” stands for capitalization, which means the size and value of a company. Large-cap funds (worth more than $10 billion) carry lower risk, but you’ll make less money. Medium cap stocks (worth between $2 and $10 billion) are moderately risky, and small cap funds (worth under $2 billion) are the most risky—but have biggest payoffs. So if you invest in a small cap aggressive growth fund, you’re in for a wild ride!
If you’re not sure if your investment portfolio is diversified enough, be sure to talk with an investing professional. If you need to find one in your area, check out the Dream Team section of my website. There you can find financial pros who can help you achieve your retirement goals!