How does the stock market work?
Compare your retirement account, the S&P 500 Index and the economy and you will see they follow each other every year.
A. Your retirement account consist of companies that are in the S&P 500 Index which is the stock market.
B. The S&P 500 Index is 500 of the biggest companies in the world.
C. All these companies rise and fall depending on their earnings which is a reflection of our economy.
How come Mutual Fund Managers do not sell bad funds?
Mutual Fund Managers of retirement accounts will not do this because they make their money off higher annual fees in the stock funds that control the stock market. For their purpose, they have to keep your money in these funds even if it has a negative rate of return.
The mutual fund companies would not make money if they were to switch funds every time the economy went in to a recession. Low risk funds are charged less compared to Stock Funds because there are no companies to manage.
What if my funds are below the 1 year average?
Two options:
A. Wait and see, which could take a while.
B. Switch to a money market fund, government security fund or bond fund to minimize future losses.
How do I know which rising funds to have in my account?
The term used is "follow the leader" and that means pick the funds that are performing as good or better than the S&P 500 Index. On your retirement account website compare the chart of the S&P 500 Index and the chart of your funds to see how they are performing over the last 6 and 12 months.
What is a mutual fund?
Mutual funds are a way to invest for retirement by investing money in stocks or low risk securities. The types defined here are stock funds, money market funds, bond funds and government security funds.
Mutual Funds fall into four categories:
1. Small Cap Funds = small size companies
2. Medium Cap Funds = medium size companies
3. Large Cap Funds = large size companies
4. International Funds = emerging companies in different countries
Some mutual funds are mixed such as:
1. Medium Blend Funds - could be medium, large and small companies
2. Small Blend Funds - could be small and medium companies
3. Large Blend Funds - could be large and medium companies
Other mutual funds are Target date funds such Retirement Date 2020, Retirement Date 2040 or etc...
This means that if you are retiring in the year 2020, that mutual fund will have a higher percentage of bonds, money market funds with a low percentage of stocks.
If you are retiring in the year 2040, that mutual fund would have a higher percentage of stocks with a lower percentage of bonds and money market funds.
You would still need to read the definitions on your account website to find out if the stocks in that fund consist of small, medium or large companies.
What is a stock fund?
These are the funds that you see having huge negative returns. Stock funds are a collection of many companies put together to create one fund. The stocks of these companies are bought and sold in these funds. Their value rises and falls depending on their earnings which reflects the economy.
Fees are higher in these funds because they have to be managed with all the buy and selling of different companies. Many of the companies in your stock funds are listed in the S&P 500 Index. A stock fund is also called a equity fund.
What is a safe mutual fund?
They are a money market fund, bond fund or government security fund. They are low risk investments such as government certificates or high rated paper securities. Their value remains constant over time and do not rise or fall as much with the economy. They are considered safe havens when the stock market declines.
Compare these from your statement to see which one is performing better over a period of six months when making a decision. Fees are lower in these funds because there are no companies to manage.
What is the S&P 500 Index?
The S&P 500 Index is 500 of the biggest companies in the world. Some of the names are: Microsoft, Walmart, Exxon, AT&T, Pepsi, Bank of America, Pfizer and GE.
What about other indexes?
There is the Dow Jones that consist of only 30 companies and the Nasdaq that has over 3,000 small, medium and large companies. These two indexes mimic the S&P 500 Index.
Conclusion:
Transferring to low risk mutual funds when the market collapses would have saved over 40% in your retirement account in years 2001 to 2002 and 2007 to 2008. Get the help of a Financial Advisor.
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