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Mutual Funds: Asset Allocation, Retirement Planning, Choosing a Broker & Further Reading

I have a BA in Natural Sciences and Mathematics and am currently working towards a Certificate of Finance from TESU. (Only 3 credits to go!)


Thanks for checking out the fourth (and final) installment of this tutorial! Previously, in Mutual Fund Investing for Beginners, we defined and categorized mutual funds in plain English, staying far away from that derivative of ancient Greek that Wall Street insiders seem so often to converse in. Then, in Different Varieties of Mutual Funds, we discussed the common types of funds that are available to personal investors . Finally, in Selecting the Best Mutual Funds, we learned some easily measurable criteria to assess whether a mutual fund is worth your hard-earned investment capital. I also alluded to a list of the very best mutual funds in the country, to be used as a benchmark comparison for every other fund under the Sun.

In This Article

  • Compound Interest Explained
  • Asset Allocation Formula. A simple mutual fund asset allocation formula based on your age and risk tolerance.
  • Investing for Retirement. The low-down on individual retirement accounts (IRAs) and the benefits of investing in these tax-free shells.
  • Choosing a Mutual Fund and/or Broker. A list of some of the most respected mutual fund companies, as well as some superb mutual funds worth checking out.
  • Resources. Links to investment education resources and popular financial newsletters.

Ready, Set ... Not Yet!

Before we dive into asset allocation, let's take a moment to review compound interest:

Compound interest occurs when interest earned is combined with the principal investment, so that the new total replaces the original principal, and subsequently begins earning interest. For example, if a principal of $10,000 is invested in a security that yields ten percent in compounded interest per year, then the new principal becomes: $10,000 + $1,000 = $11,000. (Now $11,000- i.e. the "new" principal- will earn ten percent interest over the course of the second year, and at the end of that year the interest earned will be combined with the $11,000 to create yet another new principal, which will in turn earn ten percent interest during the course of the third year, and etc, etc.)

The formula used to calculate compounded interest in Table 1 is:
A = P[1 + (r/n)]nt
, where: A = The answer; P = Principal; r = Interest rate; n = times compounded per year; and t = Number of years.

... Phew!

Mutual Fund Asset Allocation Formula (by Age and Risk Tolerance)

Time to slice up the pie — of your investment portfolio!

Time to slice up the pie — of your investment portfolio!

Okay, so now you know what kinds of funds you would like to invest in, but you've got to decide how much to invest in each type! This decision will be based on factors including your financial goals and the timeline that you have in mind for meeting them, as well as your overall tolerance for risk. With greater risk comes the potential for greater rewards- as the saying goes- but as every mutual fund prospectus is required to tell you: Past performance is no guarantee for future results. For example, even though the stock market has historically averaged a return rate of about ten percent per year,1 there is no guarantee that it will continue to do so... After all, a meteor could come hurtling through the earth's atmosphere and crash into the New York Stock Exchange before Bruce Willis and Ben Affleck can formulate an appropriate response! (However, if this happens, your mutual fund portfolio will likely be the least of your problems.)

As touched on in Different Varieties of Mutual Funds, one way to protect yourself from wild market fluctuations is to adequately diversify your stock portfolio. Additionally, another method of diversification employed by investors is to spread out investment dollars over inversely related market sectors. That way, if one sector should take a nosedive in value, the losses will be offset by another on the rise. The stock and bond markets have a tendency to move in such a fashion, and as a result many investors offset their stock holdings with bond holdings, and vice versa, in an attempt to hedge their bets.

Stocks are considered to be more risky than most bonds- and likewise for the mutual funds corresponding to these market sectors- but the potential for returns on stock investments are much higher than what may usually be expected from bonds. Therefore, a person's tolerance for risk, financial goals, and expected investment time frame all should be considered before any decisions are made on how to slice up the investment pie. For instance, the longer a person intends to hold stocks, the longer those stocks have to weather down markets and take advantage of up markets, thereby earning a decent return. So if a person intends to stay in the market for, say, ten years or longer, he or she would want to invest more heavily in stocks than bonds. Contrarily, if someone will have need of investment dollars in under five years, then it makes sense to invest more heavily in bonds, to protect against unfavorable market swings.

Table 4

Formula for (Retirement Planning) Asset Allocation

Risk Tolerance% of Bond Holdings% of Stock Holdings


Equal to Your Age

100 - Your Age

Somewhere in Between

Equal to Your Age - 10

110 - Your Age


Equal to Your Age - 20

120 - Your Age

Edwin Booth, as quoted during a production of the lesser known — though, arguably just as important — Shakespearean masterpiece: Hamlet ... on Wall Street!

Edwin Booth, as quoted during a production of the lesser known — though, arguably just as important — Shakespearean masterpiece: Hamlet ... on Wall Street!

With failing confidence in our (U.S.) government, uncertainty over the future of social security, and record breaking increases in the cost-of-living, it makes sense to start putting a little away for retirement sooner rather than later. Investing the money that you have been saving up for your twilight years (at a level of risk that you are comfortable with, as discussed above) is a great way to let your money grow so that you can meet your financial goals. After all, you want to be able to spend as much time as you please napping in your backyard hammock, rather than greeting people at Wal-Mart.

Many people have misconceptions about what retirement vehicles like IRA and 401(k) plans are exactly, so I will attempt to clear it up here as concisely as possible:

Retirement accounts (like IRAs and 401(k)s) are not investment securities! Rather, they are shells that protect the securities that you choose to invest in (like the mutual funds discussed in this article) from taxation. Basically, all of the monies that you invest- in whatever securities you choose- that are classified as falling under the shell of your retirement portfolio will grow untaxed until you decide to cash in.

Table 5

(Alphabetical) Listing of Some Respected Mutual Fund Companies


American Century


Artisan Funds


Cohen and Steers Realty


Dodge & Cox


Fidelity Funds


Harbor Funds


Masters' Select Funds


Neuberger and Berman Funds




T. Rowe Price Funds


Tweedy Browne Funds


USAA Funds


The Vanguard Group


However, the rub is that if you try to withdraw money earned from investments that have been designated in this way before you have reached a certain (retirement) age, then you are slapped with hefty fees in addition to the regular taxes that you are then expected to pay. There are a few exceptions to those rules. Also, different kinds of retirement plans handle taxation in different ways. For example: a Roth IRA is a shell for investments where taxes are paid up front, and then deferred at the time of withdrawal. This makes sense for people who plan to be in a higher tax bracket at the time of retirement.

If your employer offers a 401(k) plan where a certain percentage of your contributions are matched, then take them up on it! You can have other- separate- retirement plans as well, to round out your portfolio. Even better, if you change jobs you can roll over your existing 401(k) to a 401(k) offered by your new employer!

Frankly, if you do enjoy keeping more of your money- and you don't enjoy paying taxes- then there really aren't many arguments to be made for not taking advantage of tax-sheltered retirement accounts! In addition to 401(k) plans that are offered by many employers, you may ask whatever mutual fund provider and/or brokerage you decide to go with to designate (at least one of) your accounts with them as an IRA account. (Mutual fund providers and brokerages are discussed in the next section.)

Buy and hold your investments for the long haul, to keep down trading costs and maximize profits. Do not purchase shares in stock mutual funds that you plan to hold for less than five years, at a minimum. Preferably, you should maintain your positions for ten years or longer.

Be disciplined, and don't panic during market slumps. If anything, consider purchasing more shares when one or more of your mutual fund's share prices drops in a down market!

This article was written with an audience in mind that has little to no interest in learning more than is absolutely necessary about mutual funds in order to start investing in them. If such is still the case for you, then I recommend forgoing a brokerage altogether, and purchasing your mutual funds directly from the parent company. I list the contact information for the most respected companies in Table 5 above.

Table 6

(Alphabetical) Listing of Some Popular Online Brokerages

Charles Schwab






Interactive Brokers


Muriel Siebert




TD Ameritrade




T. Rowe Price




A List of the Top Mutual Funds in the Country (by Category)

In this section, I'll list some of the most respected mutual funds in the country by category, so that you will have a basis for comparison for any funds you may be interested in. Within the respective categories, fund providers are separated by semicolons, and different funds offered by the same providers are separated by commas.

U.S. Stock Funds: American Century Income, Growth; Dodge & Cox Stock; Fidelity Disciplined Equity, Equity-Income, and Fidelity Low Priced Stock; Masters' Select Equity, Smaller Companies, and Value; Neuberger and Berman Focus; T. Rowe Price Spectrum Growth (has some foreign holdings); Vanguard Total Stock Market Index, Primecap, S&P 500 Index, Tax-Managed Capital Appreciation, and Tax-Managed Small Capitalization

International Stock Funds: Artisan International; Fidelity Diversified International; Harbor International; Masters' Select International Equity; Oakmark International and Global (has some U.S. holdings); TIAA-CREF International Equity; Tweedy Browne Global Value (has U.S. holdings); Vanguard International Growth, Tax-Managed International, Total International Stock Index

Bond Funds:
1) Short-Term: Vanguard Short-Term Investment Grade Portfolio, Short-Term Tax-Exempt, and Limited-Term Tax-Exempt;
2) Intermediate-Term: Dodge and Cox Income, Harbor Bond, USAA GNMA, Vanguard GNMA, High-Yield Corporate, and Total Bond Market Index;
3) Long-Term: Vanguard Long-Term Investment Grade Bond Fund

Hybrid Funds: Dodge and Cox Balanced; Fidelity Asset Manager, Freedom Funds, and Fidelity Puritan; TIAA-CREF Managed Allocation; T. Rowe Price Balanced; Vanguard LifeStrategy Funds, Wellesley Income, and Wellington.

Money Market Funds: Vanguard's Prime Money Market; Fidelity Cash Reserves and Spartan Money Market (higher yields after $20,000); T. Rowe Price Summit Cash Reserves (higher yields after $25,000)

Remember to diversify your mutual fund portfolio by investing across a variety of sectors, to protect yourself from market fluctuations. Like Mom always says: "Don't put all your eggs in one basket!"

For example, the stock and bond markets tend to move in opposite directions. Hedge your bets by offsetting your holdings between these two antagonistic sectors.

Investor Education Websites & Financial Newsletters

Well friends, we are coming to a close. Way back in part 1 of this series, I claimed that this guide would be your one-stop-shop for a complete crash course in mutual funds. I hope that I have delivered on that promise for you! However, if you want to take your investment education to the next level, then feel free to check out the links provided below.

  • Barron's. Founded in 1921, Barron's is a weekly American financial newspaper. Each edition offers an analysis of the previous week's market activity, as well as predictive reports and commentary on the week to come.
  • Forbes Special Situation Survey. You've undoubtedly heard about Forbes' "Richest Americans" list, but did you know that the company's Special Situation Survey has been around since 1954? This publication is one of the oldest continuously published investment newsletters on the market. Subscribers receive a monthly 10-page research report recommending just one undervalued stock that Forbes believes will soar within one to two years, based on thorough fundamental analysis.
  • Kiplinger's. This is a personal finance magazine that has been around since 1947, so they must be doing something right!
  • Morningstar. An excellent resource for mutual fund research.
  • SEC. The Securities and Exchange Commission has the skinny on all of the publicly traded companies in America. (They're also the guys who took Charlie Sheen away in handcuffs at the end of Wall Street.)
  • Valueline. An outstanding stock analysis service. You may even be able to find back issues at your public library, for free (barring late charges)!
  • The Vanguard Group. In addition to offering online brokerage services and a stellar family of mutual funds, Vanguard also hosts an outstanding free learning center.
  • The Wall Street Journal. "TWSJ" has been around since the 1800s. Every self-respecting stock broker has a subscription to this iconic publication.

Test your knowledge of mutual fund investment basics!

For each question, choose the best answer. The answer key is below.

  1. Which of the following is not a category of mutual funds?
    • Stock
    • Bond
    • Hybrid
    • Money Market
    • 401(k)
  2. What are IRAs and 401(k)s?
    • They are very specific types of mutual funds used for retirement savings.
    • They are 'shells' used to protect retirement investments from taxation.
    • They are government mandated addenda to the Social Security system.
  3. Most actively traded mutual funds will grow your money faster than most passively traded index mutual funds.
    • True.
    • False.
  4. How have index mutual funds historically outperformed most actively traded mutual funds?
    • By vastly reducing operating expenses
    • By charging lower fees
    • By employing a consistent buy and hold philosophy
    • All of the above
  5. 12b-1 fees are:
    • Completely unnecessary
    • A vital part of a mutual funds marketing strategy
    • An ambiguously named fee that is used to bilk unwary investors out of their hard-earned money
    • Both 1. & 3.
  6. Front and back-end sales loads are:
    • Totally unavoidable- it's the nature of the beast.
    • Completely avoidable by choosing among the many, high quality, no-load mutual funds that are available.
    • Avoidable, but mutual funds without sales loads are inferior.
  7. What is an acceptable annual operating expense ratio for a stock mutual fund?
    • 1%
    • 5%
    • 10%
    • 15%
  8. What is an acceptable annual operating expense ratio for a bond mutual fund?
    • .5%
    • 1%
    • 3%
    • 5%
  9. If you notice your mutual fund's share price dropping in a down market, you should probably:
    • Sell your shares as quickly as possible to minimize losses.
    • Don't panic, and ride out the storm.
    • Buy more shares of your mutual fund, now that you can grab them at a discount.
    • Either 2. or 3. would be an acceptable answer.
  10. The overall stock market has historically averaged an annual return of:
    • -5%
    • 1%
    • 5%
    • 10%

Answer Key

  1. 401(k)
  2. They are 'shells' used to protect retirement investments from taxation.
  3. False.
  4. All of the above
  5. Both 1. & 3.
  6. Completely avoidable by choosing among the many, high quality, no-load mutual funds that are available.
  7. 1%
  8. .5%
  9. Sell your shares as quickly as possible to minimize losses.
  10. 10%

Interpreting Your Score

If you got between 0 and 3 correct answers: Ok, let's take it from the top...

If you got between 4 and 6 correct answers: Tsk, tsk, tsk... Looks like someone needs to march right back to their room and study!

If you got between 7 and 8 correct answers: We're getting there! Still, I know you can do better!!

If you got 9 correct answers: Well done, sir/madam! You have a solid grasp of mutual fund investment basics.

If you got 10 correct answers: When you left me you were but the learner, but now you are the master...


  1. Investing your money basics, lesson 4 [Internet]. New York, NY: CNN Money; 2012 Jul 10 [cited 2013 Oct 4]. Available from: http://money.cnn.com/magazines/moneymag/money101/lesson4/

Photo Credits

  1. 'Cherry Walker nee Leach in a Maxam Baked Pastry advertisement.' Source: Harry Poulsen, Public Domain (i.e., This photo was taken in Australia prior to 1955 Jan 1: learn more from the .pdf, Photographers & Copyright, published by the Australian Copyright Council.), via Wikimedia Commons. Circa 1951. Available from: http://commons.wikimedia.org/wiki/File:StateLibQld_1_198311_Maxam_Bakeo_advertisement,_1951.jpg
  2. 'American actor Edwin Booth as William Shakespeare's Hamlet.' Source: Original Photo by J. Gurney & amp; Son, N.Y, Public Domain (i.e., This photo was taken in the U.S. prior to 1923: learn more.), via Wikimedia Commons. Circa 1870. Derivative photo by E.N.B. Original photo available from: http://commons.wikimedia.org/wiki/File:Edwin_Booth_Hamlet_1870.jpg
  3. 'Sign indicating 1-22 Wall St. and Broadway crossing, with a brilliant blue sky in the background.' Source: Benoît Prieur, CC-BY-SA-3.0, via Wikimedia Commons. 2011 Mar 5. Available from: http://commons.wikimedia.org/wiki/File:Sign_Brodway_crossing_Wall_Street.JPG

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2013 Earl Noah Bernsby

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