For this article I assume you are a family child care provider who has saved only a little for retirement, is a novice investor, and doesn’t want to spend a lot of time learning about retirement investing.
If you have a little money to put away for your retirement, you want to put some of it in the stock market and some of it in fixed income investments such a money market funds, CDs, and real estate.
You want to invest some money in the stock market because that’s where you have the best chance to earn a return that will exceed the inflation rate over time. As a beginning investor you want to put your money in a stock mutual fund, rather than investing in individual stocks.
In a stock mutual fund your money will be used to invest in a variety of companies that meet the goals of the particular fund. For example, some funds invest in particular industries (health care, energy, transportation, etc.), or in the size of a company (small or large), or in the type of company (potential for rapid growth or payment of dividends).
But when you look closer you discover that there are thousands of stock mutual funds to choose from. How do you decide which one to pick? Is it all guesswork? How can you make an intelligent decision?
When choosing where to invest your money for retirement, there is one factor that is a critical determinant in the long-term performance of the fund. Is it the past performance of the fund, the director of the fund, or the type of companies the fund invests in?
The answer is none of the above. The most important factor that will determine the performance of the fund is the annual costs of the fund, according to a 2004 study by Standard & Poor’s, an investment research and rating firm. Since then the basic conclusions of this study have not been challenged.