Two Funds. Assume you graduated from college a few years ago, have a good job paying $55,000 annually, and want to invest $300 per month in mutual funds for retirement. Which combination of two or more mutual funds do you think would be appropriate? Give reasons for each of your selections.
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Someone who has just graduated from college is relatively young, and thus has a long horizon for investing. For such investor, a "buy and hold" strategy is commonly recommended.
The two classes of investment that have consistently shown growth over such a long horizon are common stock and real estate. A suitable portfolio, therefore, would consist of some combination of equities and a real estate fund (REIT).
Historically, actively managed funds do no better than passive index tracking funds, and yet have much higher costs. Thus it makes sense to focus on low-cost passive tracking funds.
Finally, a portfolio should be diversified to allow for variations in the performance of different types of assets and different growth rates across the global economy.
Thus the asset mix I would recommend for such an investor is 60 percent in a low-cost fund tracking the United States stock market (perhaps S&P 500), 20 percent in a fund tracking a mix of global equities, and 20 percent in an REIT.
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