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Week of February 15, 2008 •    Previous Question    |    Archive

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Q: What is the best type of fund to invest in for an IRA for a 22-year-old woman?

A: The best strategy towards a comfortable retirement is getting a head start, so I commend your interest in saving for your future at such a young age. Because you're more than 30 years from retirement, investments in an IRA (or other retirement savings plan) have decades to potentially grow and compound. I think you’ll even be surprised at how small contributions will grow dramatically.

Mutual funds^* are a great investment option for IRAs. They provide investors with a cost-effective alternative to purchasing stocks or bonds directly. They also offer investors diversification and professional management which you would not be able to achieve at lower investment thresholds.

As you know, there are quite a few more fund options available now than there were a few years ago. To help cater specifically to the retirement market, many companies have introduced Asset Allocation Funds and Target Date Funds. You can’t go wrong either way, but you should consider your specific needs and your tolerance for risk.

Asset Allocation Funds^** — Asset Allocation Funds invest with a specific risk return profile in mind. They vary from conservative to aggressive growth. Some funds have a fixed portfolio of the three main asset classes (stocks, bonds, and cash equivalents), others have a portfolio that can vary in response to changes in the economy and investment markets. Whether actively managed or not, asset allocation funds adhere to strict allocation guidelines set forth in their prospectus.

Target Date Funds^*** — Unlike Asset Allocation Funds, Target Date Funds invest with a specific time horizon in mind. The portfolio is often actively managed according to a selected time frame that is appropriate for a particular investor. So while a fund may initially start off an aggressive growth objective, over time it will eventually convert to a more conservatively managed portfolio. (Note: Target Date Funds are also known as "age-based funds" or "life-cycle funds")

As you accumulate more substantial assets in your retirement portfolio, you may benefit based on your suitability and risk tolerance by adding additional mutual funds^* that have additional focus on international markets^****, growth, or even preservation of principal/income to your portfolio. Taking this approach will allow you to customize your investment strategy and may help you achieve better results. You may eventually want to work with a financial professional to help you make the most of your accumulated assets and secure a comfortable retirement.

(Note: For more information on MainStay Asset Allocation Funds, access www.nylim.com/mainstayfunds)

*Mutual funds are offered by prospectus only. Investors are asked to consider the investment objectives, risk, and charges and expenses of the investment carefully before investing. The prospectus contains this and other information about the investment company. Please read the prospectus carefully before investing.

**Fund performance depends on the advisor’s skill in determining the asset-class allocations and the mix of underlying MainStay Funds, as well as the performance of those underlying Funds. The underlying Funds’ performance may be lower than the performance of the asset class which they were selected to represent. The Fund is indirectly subject to the investment risks of each underlying Fund held. Principal risks of the underlying Funds are described above/below. The Fund may invest more than 25% of its assets in one underlying Fund, which may significantly affect net asset value of the Fund.

Stocks and bonds can decline due to adverse issuer, market, regulatory, or economic developments. High-yield securities carry higher risks and some of the Fund’s investments have speculative characteristics and present a greater risk of loss than higher-quality debt securities. These securities can also be subject to greater price volatility.

There are additional risks associated with investing in mid-cap and small-cap securities. Stocks of mid-cap companies may be more volatile and less liquid than the securities of larger companies. Stocks of small companies may be subject to higher price volatility, significantly lower trading volume, and greater spreads between bid and ask prices, than stocks of larger companies. Furthermore, small-cap companies may be more vulnerable to adverse business or market developments and may have more limited product lines than large-capitalization stocks.

Foreign securities may be subject to greater risk than domestic investing. These may include securities markets that are less efficient, less liquid, and more volatile than those in the United States, as well as foreign currency fluctuations and different governmental regulatory concerns.

When interest rates rise, the prices of fixed-income securities in the underlying Funds’ portfolios will generally fall. Conversely, when interest rates fall, the prices of fixed-income securities in the underlying Funds’ portfolios will generally rise.

Floating rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, nondiversification, borrower industry concentration, and limited liquidity.

An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to maintain a value of $1.00 per share, it is possible to lose money.

Before making an investment in the Fund, you should consider all the risks associated with it.

The term "fund of funds" is used to describe mutual funds that pursue their investment objectives by investing in other mutual funds. Your cost of investing in the Fund may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. By investing in the Fund, you will indirectly bear fees and expenses charged by the underlying Funds in which the Fund invests in addition to the Fund’s direct fees and expenses. Additionally, the use of a fund-of-funds structure could affect the timing, amount, and character of distributions to you and therefore may increase the amount of taxes payable by you. You should consult your tax and financial professionals regarding these matters.

Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Ave., Parsippany, NJ 07054

^***"Target Date" funds allocate their investments among multiple asset classes which can include U.S. and foreign equity and fixed income securities. The funds may also allocate investments in growth and value stocks, real estate investment trusts, and corporate and U.S. government bonds. Foreign investing involves risks not associated with U.S. investments, including currency fluctuations and political and economic changes. While diversification and shifting to a more conservative investment mix over time helps to manage risk, it does not guarantee earnings growth. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. The risks associated with an investment in the fund are more fully described in the fund’s prospectus.

^**** Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in tax or currency laws and changes in monetary policies, and economic and political conditions in foreign countries.

This article is intended to provide general information only and is not intended to provide investment advice or any recommendation to buy, sell or hold securities. The content of this article is not appropriate for the purposes of making a decision to carry out a transaction or trade, nor does it provide any form of advice (investment, tax, legal) amounting to investment advice or make any recommendations regarding particular financial instruments, securities, investments or products. Any information herein has no regard to the specific investment objectives, financial situation, or particular needs of any specific investor, and investments discussed may not be suitable for all investors. Neither NYLIM nor New York life will be liable for any errors or inaccuracies in such content or any actions taken in reliance thereon. As a registered investment advisor, NYLIM may render investment advice for compensation only as permitted under applicable US and state law.

Questions will usually be answered within the next bi-weekly posting of Ask Joan. If a question is particularly involved, or the answer depends on the specific circumstances, it may be possible to give only a very general answer. In these cases, you will be advised to seek more specific advice.

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