I recently began the process of moving money from an old company retirement account into IRA accounts. (A rollover.) As a result, I've been digging into personal finance and I offer the following notes as possibly useful to other people:
- In general, investment in individual securities is unwise for retirement accounts. The usual recommendation is mutual funds.
- Brokers have extensive knowledge of the securities markets—this is what you pay them for. However, brokers make their money either from commissions on trading in individual securities or from commissions on the sale of mutual fund products. Their financial interest is not yours. Financial managers make their money from returns on the money they manage for you—for them the temptation is the deal that is too good and simple embezzlement. Brokers and financial managers are useful, but must be watched carefully. The National Association of Securities Dealers provides some information about the reliability of financial managers and brokers.
- Mutual funds are usually evaluated by their performance relative to widely-accepted market "indices"—the Standard and Poors 500, the Lehman Brothers Aggregate Bond Index, and so on. 80% of mutual funds do worse than these indices; it is hard to outsmart the market.
- There are mutual funds that are designed to track market indices; these are not a bad choice for someone who wants to make quick simple decisions. Motley Fool has some information on index funds. I find Motley Fool generally is a useful source for small investors, but to my taste they steer too close to the "casino" aspect of investing.
- There are a minority of mutual funds which consistently do better than the market indices; these are good investments. Make sure that the fund has done better than the market index for at least five years, and make sure that the fund's manager has been there for at least that long. Never be swayed by short-term performance. Remember that anyone can make money in a bull market.
- You can find clear charts of fund performance, referenced to market indices at morningstar.com (registration required), however, their best information is marketed to libraries and investment professionals; check your local library for securities information.
- Most investment experts believe that US government "debt securities" (bonds, notes, bills, and so forth) are now poor risks—Warren Buffet, one of the most famous and conservative, has removed US treasury securities from the porfolios of the large investment funds he manages; it is therefore probably wise to invest internationally.