Through mutual funds, you can invest in many companies at once whether they are good old fashioned dividend paying companies, biotech, or growth oriented companies. When you invest in many companies through mutual funds, it helps you reduce the risks that come with investing in single stocks. Depending on your life and financial situations, as well as your risk tolerance, you can select the mutual funds that fit your invest objectives and your personality. Typically, these funds are:
- Aggressive Growth
- Growth and Income
If your risk tolerance is high, the first 3 choices are appropriate. If you can't stand the roller-coaster rides, numbers 4 and 5 are probably more suitable for you.
ETFs are similar to mutual funds, but they are different in some ways. EFTs are baskets of single stocks designed to be traded on the stock market exchanges. You can buy or sell EFTs throughout the day during the trading session just like you buy or sell stocks. Mutual fund transactions take place at the end of the day after the market closes. Whether you prefer mutual funds or EFTs, it's important to consider your risk tolerance. Most of the 401(k) do not offer ETFs.
Unless you are a fortune teller and can pick a winner all the time, I'd suggest you stick with mutual funds in your 401(k).
Certificates of Deposit
This is a loser all around. 1% of the interest come means you give your money to the bank for free. They get to use your money and make a 7% profit but only give you 1% back less fees. You are better off invest your money in mutual funds.
It'a good vehicle if the equity market is over heating or the economy is heading toward a recession. Mutual fund companies often offer bond funds or income funds. They are worth a look. It's not a bad idea to own 10% to 30% of the bond funds or income funds in your portfolio. It still based on your risk tolerance.
They are complex and expensive. They are usually sold by the insurance companies. Unless they suit your needs in some way, I'd avoid them.