Whether you're an experienced investor or a novice, mutual funds can be effective building blocks for your IRA portfolio. But it's also true that finding the right mutual funds can be a chore. You have to parse through many options, and all those five-letter symbols can start to make your head spin.
Streamline that process by first taking a moment to define what you need from the funds in your IRA. Do you want a minimum-effort portfolio? Market-level growth over the long term? Or aggressive growth to build momentum as fast as possible? If any of those fit, you're in the right place. Here's a look at three fund types that match those goals, along with nine mutual funds that could play a role in growing your IRA.
Image source: Getty Images.
For the busy saver: Target-date funds
Target-date funds, or TDFs, are appropriate if you want a single, easy-to-manage fund that's diversified across asset classes. These funds follow a prescribed mix of stocks, bonds, and cash that gradually gets more conservative over time. In practice, that means you don't have to rebalance or adjust your holdings to limit risk as you near retirement.
When evaluating TDFs, be sure to review the fund's "glide path." The glide path defines how the fund's portfolio will change over time relative to the target year. Some TDFs don't reach their most conservative portfolios until well beyond the target year. These can offer more growth potential, but also more volatility. Other TDFs will reach their most conservative point either at or before the target year.
The table below shows three different fund families with three different glide paths.
|
Name |
Expense Ratio |
Total Assets |
Target Year |
When the Fund Reaches Most Conservative Point |
|---|---|---|---|---|
|
JPMorgan Smart Retirement Blend Income Fund |
0.19% |
$670 million |
Aligns with your retirement |
In the target year |
|
Fidelity Simplicity RMD Income Fund |
0.46% |
$42 million |
Aligns with your 70th birthday |
10 years after the target year |
|
John Hancock Multimanager Lifetime Portfolio
|
1.34% |
$723 million |
Aligns with your retirement |
20 years after the target year |
Table data source: JPMorgan, Fidelity, John Hancock.
As you can see, the JPMorgan fund's target year should align with the year you plan to retire. That's also the year this fund stops derisking its portfolio. At that point, the holdings will consist of 5% cash, 62.5% bonds, and 32.5% equity.
The Fidelity fund is a slightly different animal, because it's supposed to align with your 70th birthday. The portfolio does continue to evolve for another 10 years after that target year. At its most conservative, the fund holds 19% equity, 69% fixed income, 10% inflation-protected debt, and 3% long-term U.S. Treasury debt.
The John Hancock fund will hold 48% fixed income and 52% equities at retirement. The equity percentage gradually declines for another 20 years until the portfolio reaches a mix of 75% fixed income and 25% equity.
For the young saver: Equity index funds
If you have decades until retirement and you want market-level growth, consider equity index funds. S&P 500 index funds are a good starting point. These mutual funds invest in the S&P 500 companies to mimic the index's performance. The S&P 500's long-term average annual growth after inflation is about 7%. That's certainly enough to show some nice momentum in your IRA over time.
When evaluating index funds, pay close attention to the fees. All S&P 500 index funds basically have the same portfolios, so the ones with the lowest fees are best positioned for the highest returns. We're talking fractions here, but every penny counts.
The table below shows three low-cost S&P 500 index funds. Fidelity's 500 Index Fund is the cheapest and also edges out the other two in terms of performance.
|
Name |
Expense Ratio |
Total Assets |
5-year Annualized Return |
10-year Annualized Return |
|---|---|---|---|---|
|
State Street S&P 500 Index Fund (SVSPX 2.15%) |
0.16% |
$1.5 billion |
14.72% |
13.76% |
|
Schwab S&P 500 Index Fund (SWPPX 2.14%) |
0.02% |
$50 billion |
14.95% |
13.68% |
|
Fidelity 500 Index Fund (FXAIX 2.14%) |
0.015% |
$274 billion |
14.99% |
NA |
Table data source: Morningstar.
For the risk-tolerant saver: Growth funds
Growth funds invest in companies that are expected to increase their revenue and earnings faster than their peers or faster than the overall market. If those expectations pan out, the growth fund will outperform the index fund. But there's a risk of things going the other way, too.
The market has been trending up since 2009, so recent history has been good to growth funds. You can see that the three funds highlighted in the table below have achieved 10-year annualized returns in excess of 17%.
|
Name |
Expense Ratio |
Total Assets |
5-year Annualized Return |
10-year Annualized Return |
|---|---|---|---|---|
|
Vanguard U.S. Growth Fund Investor (VWUSX 2.72%) |
0.39% |
$43 billion |
22.42% |
18.10% |
|
Fidelity Growth Discovery Fund (FDGRX 2.64%) |
0.83% |
$62 billion |
26% |
20.21% |
|
T. Rowe Price Blue Chip Growth (TRBCX 2.64%) |
0.69% |
$93 billion |
19.63% |
17.37% |
Table data source: Morningstar.
Investors love growth companies in good times, but tend to move into more reliable options in bear markets. Should the market climate become more uncertain, growth funds will falter. That's a trade-off you have to accept for the higher growth potential. You should also be at least 10 years away from retirement, so you have the time to ride out any downturns.
Choose funds that match your style and risk tolerance
Mutual funds provide broad diversification for your IRA portfolio. The challenge lies in choosing funds that match your goals and investing style. Of course you want growth over time -- we all do -- but also consider how much hands-on work you're ready for and how much risk you can tolerate. Invest with those factors in mind and you're more likely to be successful over the long term.
