The best investment strategy for investment funds for most people reduces risk and gives the investor plenty of flexibility. Here's how to configure yourself to invest money so you don't have to worry when the investment environment gets ugly.
We use Jack as our example. He is afraid of losing money, but at the same time wants to earn higher returns than he can get from his bank. A moderate risk, at most, he will accept. Jack is also frugal and hates paying fees for investing money. He has a savings account in the bank, he adds regularly.
His best investment strategy, according to his brother Jim, whom he trusts, involves opening a mutual fund account with a large mutual fund company. This is where you get the best investment fund for your bucks, according to Jim, because the investment costs are low. Plus, with an investment fund, you get professional management as part of the package.
Once his account is set up, Jack will systematically invest money in four different mutual funds: a money market fund, a short-term bond fund, a medium-term bond fund and a large-cap U.S. equity fund. To lower the cost of investing even more, the equity and bond funds are index funds.
Remember, Jack is risk conscious. So here's how they set things up. Jack opens his mutual fund account by putting a few thousand dollars into a money financial goals market fund where he has great security and earns interest in the form of dividends. Plus, this gives him extra flexibility in managing his account.
They set it up so that every month a few hundred dollars flow from his bank account to his money market fund, which will be used as his cash deposit. Then, Jack instructs the gensel fund company to have money flowing each month (equal amount) to his three other funds (his investment funds) from the money market fund.
This is his best investment strategy for investment funds, and it gives Jack plenty of flexibility. If he wants to add extra money, he sends them into the money market fund without interrupting his investment strategy. If he wants to withdraw some money, he also takes it from there. He has the flexibility to change the amount of money flowing from his bank account and / or flowing into his various funds.
Initially, he should have equal amounts invested in each of his three investment funds fed the money fund. Over time, this will change as all three function differently. The short-term bond fund is the safest of the three and pays higher dividends than the money market fund, but less than the intermediate bond fund. It should not fluctuate much in price.
On the other hand, the equity fund is the most risky and has good growth potential. The value of this mutual fund will fluctuate significantly.
To keep the risk at bay, Jack will rebalance his portfolio once a year as part of his investment strategy. He wants to keep his equity fund and two bond funds roughly equal in value. To do this, he simply moves money between these three funds.
His money market fund is simply his cash container and it gives him extra flexibility. The other three funds provide higher interest income and growth (the equity fund).
This investment strategy is especially attractive in a tax-deferred or tax-free account like a traditional or Roth IRA because income taxes are not a problem until money is withdrawn from the account.
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