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You can invest in the riskier types of securities by selecting well-diversified mutual funds that mix a dash of aggressive securities with a healthy helping of more stable investments. For example, you can purchase an international fund that invests the bulk of its money in companies of varying sizes in established economies and that has a small portion invested in riskier, emerging economies. That would be safer than investing the same chunk in a fund that invests solely in small companies that are just in emerging countries.

      Review current investment holdings

      Many people have a tendency to compartmentalize their investments: IRA money here, 401(k) there, brokerage account somewhere else. Part of making sound investment decisions is to examine how the pieces fit together to make up the whole. That’s where jargon like asset allocation comes into play. Asset allocation simply means how your investments are divvied up among the major types of securities or funds, such as money market, bond, United States (U.S.) stock, international stock, and so on.

      Another reason to review your current investments before you buy into new funds is that some housecleaning may be in order. You may discover holdings that don’t fit with your objectives or tax situation. Perhaps you’ll decide to clear out some of the individual securities that you know you can’t adequately follow and that clutter your life.

      Consider other “investment” possibilities

      Mutual funds and exchange-traded funds are a fine way to invest your money but hardly the only way. You can also invest in real estate, invest in your own business or someone else’s, or pay down mortgage debt more quickly. Again, what makes sense for you depends on your goals and personal preferences. If you dislike taking risks and detest volatile investments, paying down your mortgage may make better sense than investing in funds.

Reaching Your Goals with Funds

Mutual funds and exchange-traded funds can help you achieve various financial goals. The rest of this chapter gives an overview of some of these more common goals — saving for retirement, buying a home, paying for college and higher education costs, and so on — that you can tackle with the help of funds. For each goal, I discuss what kinds of funds are best suited to it and point you to the part of the book that discusses that kind of fund in greater detail.

      As you understand more about this process, notice that the time horizon of your goal — in other words, how much time you have between now and when you need the money — largely determines what kind of fund is appropriate:

       If you need to tap in to the money within two or three years or less, a money market or short-term bond fund may fill the bill.

       If your time horizon falls between three and seven years, you want to focus on bond funds.

       For long-term goals, seven or more years down the road, stock funds are probably your main ticket.

      But time horizon isn’t the only issue. Your tax bracket, for example, is another important consideration in fund selection. (See Chapter 10 for more about taxes.) Other variables are goal specific, so take a closer look at the goals themselves.

      The financial pillow — an emergency reserve

      

Before you save money toward goals, accumulate an amount of money equal to about three to six months of your household’s living expenses. This fund isn’t for keeping up on the latest consumer technology gadgets. It’s for emergency purposes: for your living expenses when you’re between jobs, for unexpected medical bills, for a last-minute plane ticket to visit an ailing relative. Basically, it’s a fund to cushion your fall when life unexpectedly trips you up. Call it your pillow fund. You’ll be amazed how much of a stress reducer a pillow fund is.

      How much you save in this fund and how quickly you build it up depends on the stability of your income and the depth of your family support. If your job is steady and your folks are still there for you, then you can keep the size of this fund on the smaller side. On the other hand, if your income is erratic and you have no ties to benevolent family members, you may want to consider building up this fund to a year’s worth of expenses.

      The ideal savings vehicle for your emergency reserve fund is a money market fund. See Chapter 11 for an in-depth discussion of money market funds and a list of the best ones to choose from.

      LOOKING AT HIGH-RISK FUNDS

      The goals discussed in this chapter — creating and maintaining an emergency fund, retirement, buying a home, higher education funding, and so on — are traditional and common goals that many folks have. Of course, you may have some other dreams and aspirations. And those need not be that specific. For example, maybe you’d like to take some greater risk with some of your money because “you only live once” (also known as YOLO). I observe that line of thinking with a number of young adults.

      As a constant observer of the mass media, the YOLO crowd has plenty of interests including such vehicles as meme stocks, options trading, cryptocurrencies, NFTs, cannabis stocks, and more. What all of these have in common is that you won’t find any recommended funds in this book that specialize in these either because they’re way too risky and/or disallowed by the Securities & Exchange Commission in mutual funds. As a better long-term alternative, I encourage you to find out about the higher-risk stock funds discussed in this book.

I strongly recommend that you limit such high-risk investments to a small or modest portion of your portfolio, such as 5 to 10 percent. Also, be honest with yourself about the risks you are taking and the possibility with really-high-risk investments of losing your entire investment. People are lured into such investments by dreaming about the potential profits if they are right, but they often fail to realistically consider the downside if they are wrong. Last but not least: You should never ever put money that you might need for an emergency (such as losing your job, suffering medical problems, being hit with unexpected home or auto repairs, or having a family emergency) in these high-risk investments.

      The golden egg — investing for retirement

      Uncle Sam gives major tax breaks for retirement account contributions. This deal is one you can’t afford to pass up. The mistake that many people at all income levels make with retirement accounts is not taking advantage of them and delaying the age at which they start to sock money away. The sooner you start to save, the more confident you can be in having enough to retire comfortably, because your contributions have more years to compound.

      Each decade you delay approximately doubles the percentage of your earnings that you should save to meet your goals. For example, if saving 5 percent per year starting in your early 20s would get you to your retirement goal, waiting until your 30s may mean socking away 10 percent; waiting until your 40s, 20 percent; beyond that, the numbers get troubling.

Taking advantage of saving and investing in tax-favored retirement accounts should be your number-one financial priority (unless you’re still paying off high-interest consumer debt on credit cards or an auto loan).

      Retirement accounts should be called tax-reduction accounts. If they were called that, people might be more excited about contributing to them. For many people, avoiding higher taxes is the motivating force that opens the account and starts the contributions. Suppose you’re paying about 35 percent between federal and state income taxes on your last dollars of income (see Chapter

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