The easy option for most retirement savers is to put money in mutual funds. In turn, each mutual fund typically has holdings of stocks or bonds.
But mutual funds aren't your only option. There's also a close sibling called exchange-traded funds (ETFs). And there's the opportunity to buy individual investments (like shares in Google or Gillette) on your own. These options are often accessible not just in brokerage accounts but also when you're saving in a tax-sheltered IRA (Individual Retirement Arrangement).
ETFs are like mutual funds in many ways. You buy shares of a fund that holds a large pool of investments. Some ETFs track stock market indexes, or invest in major classes of bonds.
With ETFs, the "exchange traded" part is important. You can buy or sell your shares any time during the financial market's trading day, whereas mutual fund transactions typically occur at the end of the trading day, even if you placed your order in the morning or the night before.
But some researchers have found that ETFs have greater "tracking error" than mutual funds typically do. Tracking error is when a fund's performance deviates from the stock index that the fund aims to mimic,
And consider per-transaction commissions, as well as annual management fees ("expense ratios"), when weighing the costs of ETFs vs. mutual funds.
If you buy individual stocks or bonds, remember not to put too many of your eggs in one basket. One of the most common mistakes, potentially tragic, arises when workers put lots of their savings in the stock of their employer. If that one stock fails to keep up with the broader market, or plunges (think Enron back in 2001), it has an outsized impact on your standard of living.
