The mutual fund spectrum comprises an array of funds, from aggressive growth and international funds with a high-risk level to money market investments with a much lower risk level. Every investment contains some level of risk. In fact, even the most conservative investment has inherent risks – namely, that rising inflation could outpace your investment.
Before you consider investing in any fund, it's important that you know, and are comfortable with, its risk level. If you can't sleep at night knowing that your money is invested in a high-risk foreign stock fund, don't invest in it. Remember, though, that risk and reward generally go hand in hand. The greater the risk, the greater the potential for reward.
The combinations of mutual funds you choose affect your portfolio's overall risk level. A technology fund, for instance, inherently contains more risk than a more diversified fund, because it invests heavily in one industry. If technology happens to fall out of favor, like it did recently, you run the risk of losing money. By choosing different types of funds that invest in various industries, company sizes, and even countries, you lessen the risk of any one investment type dominating your portfolio.
Time
Part of your risk assessment should depend upon when you'll actually need to use your money. If you'll need it soon, you'll probably want to stick with conservative investments with a relatively low level of risk. After all, the last thing you want to do is sell your shares during a downturn – it defeats the whole purpose of investing. But if you have ten or fifteen years until you'll need the money, and you're reasonably sure that you could stick with your strategy through a severe bear market in the interim, your aggressive nature and a few well-chosen stock funds might help you to earn higher long-term growth.
Would you like to know more about mutual funds? If your 401(k) plan account is serviced by Fidelity, you can access "The Mutual Fund - It's No Mystery," a six-part series covering the basics. Find it by logging into Fidelity NetBenefitsSM and clicking on the Planning tab.
Cheryl Marconi is a Massachusetts-based financial writer and editorial consultant. She has worked in the publishing and financial services industries for the past twelve years.
