Money Girl answers listener questions and explains how to invest money in your retirement account, so you take the right amount of risk and reach your financial goals.
Fund Type #4: Fixed Income or Bond Funds
Your investment menu should include some amount of bond funds, which might also be called income or fixed-income funds. They’re primarily made up of individual bonds, which are loans given to a company or a government entity for a set return.
While the value of a bond fund can go up or down, its main objective is to provide income or a steady cash flow to investors. Bond funds won’t offer much investment growth, but they do protect you from losses.
If you’re a young or middle-age investor, you should own some amount of bond funds in order to temper the risk of stock funds. However, owning too much could make your portfolio too conservative to reach your retirement goals.
Fund #5: Money Market Funds
Mina asked how to invest with as little risk as possible, and this is it. However, as I mentioned, the purpose of investing is to make your money grow so you can achieve your goals. If you want to accumulate a million dollars for retirement, but are only willing to take a level o f risk that pays 1% per year, you'll need to invest about $2,400 a month to get there.
In fact, earning just 1% isn't even enough to even keep up with the annual rate of inflation, which has been about 3% historically. In other words, if your investments are earning about 3% or less, you're actually losing purchasing power over the long term.
So don't choose a money market fund for your entire retirement portfolio unless you’ve already achieved your retirement goals and just need a safe place to park your cash.
Learn more about the pros and cons of different types of retirement accounts, click here to download the free Retirement Account Comparison Chart.
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