Should I Invest in Mutual Funds for My IRA?

It is not an easy decision as to in which mutual funds you are going to invest your hard earned retirement dollars. You certainly don't want to make any big mistakes --- and if you get too careless, you will make a big mistake.

Mutual funds allow you to have a diversified investment portfolio.  A diversified portfolio is important because it can reduce your overall risk.  Since a mutual fund contains the common stocks of a variety of different companies, the risk is spread around. This reduces the chance that a bad performance by a few stocks will cause a substantial loss to your retirement IRA.

Diversification of assets is an important investment strategy for all investors but is has more significance for your IRA retirement account.  It's not like when you were young and there was plenty of time to make up for any bad financial setbacks.  When you retire, you generally won't have any more big paydays.

One mutual fund will usually not offer you the complete diversification that your retirement assets should have.  It is better to be invested in at least several mutual funds to better protect yourself against a decline in the market.

Equity funds, which really means stock funds, can consist of growth and value funds.  Growth and value stocks can be either large, mid or small capitalization companies.  There also are funds of foreign companies which would give you a global diversification feature. 

A diversified retirement portfolio along with stock funds should also contain fixed-income security funds, which are really bond funds.  Bonds funds can be investment-grade which means they are of higher investment quality but generally pay lower interest.  Bond funds can also consist of high-yield bonds, also known as junk bonds, which pay higher interest but are of poorer investment quality.

 

If all of the above seems complicated and overwhelming to you, you are correct --- it is!  To become properly diversified, you would have to invest in many types of mutual funds. Most people don't have the investment skill or the time to successfully diversify their retirement assets.

But there may be a better way --- Asset Allocation Funds.