- Index funds are among the simplest, and least expensive, of all stock market investments. These funds mimic the performance of the broad stock market by holding all of the funds in a given index. Some of the most popular index funds track the performance of the Standard and Poor's (S&P) 500 index, while other funds use other indices as their benchmarks. These funds tend to have very low expenses, since they do not need to hire expensive money managers to pick and choose stocks. Index funds are also very tax-efficient because they generate fewer capital gains than actively-managed funds.
- The managers of growth funds choose stocks based on their potential for future appreciation. Growth stock funds use one or more money managers whose job it is to research companies and choose the ones with the highest growth potential. When choosing a growth fund, it is important to compare its performance to an unmanaged index like the S&P 500. When conducting your research, you should look for a fund that has consistently outperformed that index year after year.
- Sector funds invest in a particular segment of the stock market, such as pharmaceutical stocks, energy stocks or large retailers. You can find mutual funds that concentrate their exposure in virtually any part of the market. These funds can be a good choice if you are looking for concentrated exposure to a single part of the market, especially if you expect that segment to outperform others in the long run. Be cautious about investing in last year's hot sector, however, because the sector that rose sharply during the past year could fall just as sharply going forward.
- Having some money outside your home country can be a smart strategy, since country markets seldom are in lock step. International funds can also provide additional diversification and give you exposure to markets with a higher growth potential. Some international mutual funds are widely diversified, with exposure to all parts of the world and virtually every country. Others are more tightly focused, concentrating on a specific region, or even a specific country. No one international investment approach is right for everyone, and you will need to assess your own needs and risk tolerance when choosing such an investment.
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