Assessing Your Assets

How should you invest your savings? financial planners suggest owning a mix of stocks and bonds, with a higher percentage of riskier investments when you are younger. Equities historically earn higher returns, and if you are a long way from retirement, you can afford to weather swings in the stock market comfortably. Given the eroding effect of inflation on the value of funds saved for retirement in the future, that margin of higher returns is especially important.

You must figure out your personal level of comfort in taking investment risk. If you yank your money out of the stock market every time it takes a nose dive, then you probably should not invest too heavily in stocks.

Finally, once you know what level of risk you can stomach, most financial planners advise you to pick the equity portion of your investments from a group of mutual funds, including those specializing in international stocks, growth and income funds, and some mix of funds focusing on small and large companies. The individual fund is less important than choosing from the mixture of asset classes that traditionally has the amount of risk and investment return that meets your goals. If you donąt have the patience to monitor your fundsą performance, investigate index funds, such those tied to the Standard & Poorąs 500 index (the largest 500 stocks in the U.S. stock market). Over time, few actively managed mutual funds consistently outperform the stock market as a whole; index funds, with lower trading costs and expenses, by definition closely track the performance of their market indexes. The down side is that index funds cannot, by definition, outperform their market segments.