Trying to plan for your retirement may sound complicated. But it's a lot simpler than it seems -- and you have mutual funds and exchange-traded funds (ETFs) to thank for how easy it can be to implement a solid investing strategy.
Asset allocation made easy
Most retirement planning rests on the foundation of asset allocation. Depending on your age, the amount you have to invest, and your risk tolerance, you first figure out how much of your money you want to invest in stocks, bonds, and other types of assets. Then, within each of those categories, you can dig deeper and spread your money across different sectors, geographic regions, and company sizes.
Figuring out a good asset allocation strategy isn't all that complicated; you can find plenty of pointers on how to find the optimal allocation right here. What can get complicated in a hurry, though, is deciding how to implement that strategy.
How many stocks can you follow?
The Fool has always encouraged investors to research and invest in individual stocks. You can certainly create a portfolio composed entirely of individual stocks that will technically meet the guidelines of your asset allocation.
Where you'll often run into problems, though, is in building a diversified portfolio. Consider: To have a truly diversified portfolio of large-cap U.S. stocks, for instance, you'd probably want 10 to 12 different stocks. Now add in a separate portfolio of small caps, global stocks, REITs, and fixed-income investments, and you can see just how monumental a task it can be to build that initial portfolio -- let alone keep track of the dozens or even hundreds of different investments you'd need to stay diversified.
Moreover, you may not have enough money to spread across so many stocks if you dedicate just a sliver of your total wealth to a particular type of investment. For instance, if you have $10,000 and want to invest 3% of your portfolio in micro-cap stocks, can you really buy multiple stocks with $300?
An example: international investing
For instance, this month's brand-new issue of the Fool's Rule Your Retirement newsletter -- which comes out this afternoon at 4 p.m. ET -- includes a discussion from Fool asset allocation expert Robert Brokamp on various ways to add international stocks to your retirement portfolio. If you're willing to focus on large-cap stocks like Petrobras
That's why Robert talks about alternatives like international index funds. By combining a fund that owns large, developed-country stocks like BP
That's just one way that mutual funds and ETFs can be handy. Need some exposure beyond the S&P 500? The Vanguard Extended Market ETF includes key stocks your S&P index fund leaves out, including Visa
The last question
With mutual funds, one fundamental question to answer is whether you want to passively follow an index or have someone actively manage the fund. Active management typically costs more, but in some cases, strong managers can more than make up for that increased cost through higher returns. Luckily, with most of the investments you'll want for your asset allocation strategy, there's a good variety of index funds and actively managed funds to choose from. For instance, this month's Rule Your Retirement features some great recommendations on actively managed international stock funds from Foolish fund expert Amanda Kish.
Mutual funds play a key role in any retirement portfolio. Unless you're a true diehard investor with the time, money, and inclination to juggle countless individual investments, you'll probably find that a well-chosen mutual fund takes a big load off your shoulders.
This month, our team of Foolish mutual fund experts joins Rule Your Retirement. As a result, you'll get even more coverage of issues affecting mutual fund investors, as well as advice on how funds can make your investing a lot easier. Check out the new issue today -- it's easy with a free 30-day trial.
Fool contributor Dan Caplinger has used mutual funds from day 1 of his investing career. He doesn't own shares of the companies mentioned in this article. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Third Avenue Real Estate Value is a Motley Fool Champion Funds recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is rich with information.