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.
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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