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5 top funds for your 401 (k) – The Motley Fool



Trying to decide which mutual funds to choose for your 401 (k) can be a nerve wracking endeavor.

But that does not have to be.

To make retirement planning easier for you, here are five types of funds that can help you achieve high investment returns while managing risk carefully.

  The word 401k written in gold letters on wood planks

Source: Getty Images

Large-Caps [19659007] Large cap US stocks should form the core of your retirement savings portfolio. These are some of the largest and most successful companies in the world with a market capitalization of $ 1
0 billion or more. Large cap US stocks have been proven to provide long term returns for investors averaging 8 to 10% per annum. One of the best ways to engage in this asset class is a S & P 500 index fund that provides access to 500 of the largest listed companies in America.

Outstanding options for S & P 500 funds are Vanguard 500 Index Fund Admiral Stocks (NASDAQMUTFUND: VFIAX) Schwab S & P 500 Index (NASDAQMUTFUND: SWPPX) and Fidelity Spartan 500 Index [19659011] (NASDAQMUTFUND: FUSEX) . These funds have annual cost ratios ranging from 0.04% to 0.09% – an important factor in investing in mutual funds. If everything else is the same, the less you pay, the more wealth you will build up.

Small Cap Stocks

Smaller companies have historically outperformed larger companies. This is because these companies can often increase their revenue and profits faster than their bigger brothers.

Small-cap stocks – generally considered to have a market capitalization of less than $ 2 billion – are typically less risky than large caps. They also tend to be more volatile, which means that their prices fluctuate more. But you can offset that risk and volatility by keeping the other funds on this list that work together to diversify your portfolio appropriately.

A good choice is Fidelity Small Cap Index Fund (NASDAQMUTFUND: FSSNX), Vanguard S & P Small Cap 600 Index Fund (NASDAQMUTFUND: VSMSX) and Schwab Small Cap Index Fund (NASDAQMUTFUND: SWSSX) The all annual fees have less than 0.10%.

Mid-Cap Equities

Mid-cap companies have a market capitalization between small caps and large caps (between $ 2 and $ 10 billion). Mid-cap equities tend to be better-established companies than small caps, but with greater growth opportunities than large caps. Thus, they can add another potential source of strong returns while diversifying your portfolio further.

The Vanguard Mid-Cap Index Fund (NASDAQMUTFUND: VMCIX) and Fidelity Mid Cap Index Fund (NASDAQMUTFUND: FSTPX) are two solid funds in this asset class, and both have cost ratios of about 0.04%.

Emerging Markets Funds

International equity funds can help add another important level of diversification to your investment portfolio. These funds are often classified as either developed funds or emerging markets funds (also known as emerging markets).

Of these two, I would choose an equity fund for emerging markets. Emerging markets tend to grow faster than developed countries and can therefore generate higher returns. In fact, China, India and other developing markets are expected to generate a significant portion of global economic growth in the coming decades.

The [FidelityEmergingMarketsIndexFund (NASDAQMUTFUND: FPADX) is a strong issuer option here, with one of the lowest – if not the lowest – cost rate among the emerging markets funds at 0.09%.

Short Term Bonds

Last but not all – investors might want to include a bond fund in their 401 (k).

I am convinced that investors with more than a decade to retirement do not need to invest in a bond fund. Bonds and other bond funds generally generate significantly lower long-term returns than equity funds. In the coming years, equities could rise even more as interest rates rise, as many market observers expect. When interest rates rise, the prices of existing bonds – and thus pension funds – fall.

While bond funds tend to be less volatile than equity funds, younger investors do not need that advantage because they can easily break market failures. Market selloffs can be beneficial to equity investors because you can buy more stocks at low prices.

Even those closer to retirement age may no longer need to buy retirement funds if they have cash reserves of 401 (k) s that they can use to finance their first few years of retirement. This allows you to hold your 401 (k) assets in stocks that are likely to generate higher long-term returns, thereby providing you with significantly more money later on retirement.

However, if your 401 (k) holds the vast majority of your retirement assets, and you are close or retired, then a retirement fund might be useful. In this case, I would use a short-term bond fund, as shorter-dated bonds are less exposed to interest-rate risk than longer-dated bonds. You will get a lower return, but you will protect yourself from the possibility of significant losses (as is the case with longer-term bond funds) if interest rates rise in the coming years.

The Avant-garde Short-Term Index Fund (NASDAQMUTFUND: VBISX) is a solid choice in this regard, with an annual issue fee of 0.15%.

All Together

A portfolio of large, mid and small cap stocks allow you to benefit from the growth of nearly the entire US economy. With an emerging market equity fund, you can further diversify your portfolio and add another strong growth element driven by the fast-growing international economies. After all, a short-term pension fund can – if it fits your personal situation – help to protect and preserve the money you need in the near future. Together, these mutual funds can form the core – or even the entirety – of a well-diversified 401 (k) investment portfolio.


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