04/2020 KIPLINGER’S PERSONAL FINANCE 49socked away in a money
market fund or a high-qual-
ity short-term bond fund.
For most investors, a
good, low-cost target-date
fund is a fine choice, no
matter how far-off or close
you are to retirement. These
funds do the work for you,
shifting from an aggressive
to a more conservative
blend of assets over timeKipTipFind Good Funds for Your HSA
If an all-in-one mutual fund isn’t for you, keep these tips in mind
as you search for good funds with strong track records and low
costs.Objective. Figure out your goal, then find a fund that fits. If you
can’t afford the losses that come with occasional, but inevitable,
down markets, stick with a money market fund or a short-term
bond fund. Bond funds tend to be less volatile than stock funds.
But depending on what kinds of fixed-income securities they in-
vest in—government bonds, corporate debt or mortgage-backed
securities, for example—they will vary in risk, return and volatil-
ity. Stock funds offer more growth potential than money market
or bond funds, but they come with greater risk, too.Performance and risk. Look for a fund with a three- and five-
year record, under the same manager, that beats its benchmark
and its peers. But dig deeper. Year-by-year returns may reveal a
nasty roller coaster ride. If you can, find out how the manager
performed during market corrections. How did that U.S. stock
fund you’re eyeing fare over the last three months of 2018, when
Standard & Poor’s 500-stock index lost nearly 14%? A look at
how a fund performed during good years and bad years can give
you an idea of its volatility. Can you sit through the downdrafts
without flinching?Fees. You’ve heard it before: Fees eat away at your investment
over time. A $10,000 investment growing 10% a year with a 1.5%
management fee translates into roughly $50,000 after 20 years.
But a similar investment in a fund with just 0.5% in expenses
would be worth more than $60,000. Keep averages in mind as
you scrutinize fund fees. The average U.S. stock mutual fund
charges 1.07% in annual expenses; taxable bond mutual funds
average 0.90%. Exchange-traded funds, available in HSA plans
that have brokerage windows, charge even less. U.S. stock ETFs
cost an average of 0.35% per year; taxable bond ETFs, 0.30%.as you near the target year—
in most cases, a year closest
to when you plan to retire.
The typical target-date fund
for savers in their twenties
and thirties holds 90% of its
assets in stocks; funds for
investors in their fifties and
early sixties hold between
50% and 60% in stocks and
the remainder in bonds.
Even a balanced fund,which holds a static position
of 60% stocks and 40%
bonds, will work well for
most investors with short
to medium time frames.
Workers in their twenties,
thirties or even forties, who
have decades to go before
retirement, can afford to
spice up their investments.
Some financial advisers, in-
cluding Haynes, the Rich-
mond, Va., financial planner,
invest a large portion of
younger clients’ HSAs ag-
gressively, in small-company
and emerging-markets stock
funds. The point is to take
advantage of the many tax
benefits that come with an
HSA and invest for growth
so that assets in the account
increase as much as possi-
ble. “That’s aggressive, but
it’s balanced with more-
conservative investments
in other accounts,” says
Haynes. In fact, most of
Haynes’s clients keep
enough cash in their HSA
to cover their annual de-
ductible, even though they
don’t plan to use it. “It can
supplement a cash emer-
gency fund if a client were
to experience very high
medical costs,” she adds.
That’s the other upside
to having an HSA. Unlike an
IRA or a 401(k), you can ac-
cess the funds if absolutely
necessary without paying a
tax penalty. “It’s like having
personal hazard insurance,”
says Lake, the New York
City financial adviser. The
money is there if you ever
experience a serious health
care emergency, but ideally
you won’t need it and you’ll
invest it so it can grow for
decades. Q
FOR QUESTIONS OR COMMENTS, PLEASE
E-MAIL [email protected].If an all-in-one mutual fund isn’t for you, keep these tips in mind
as you search for good funds with strong track records and low
costs.Objective. Figure out your goal, then find a fund that fits. If you
can’t afford the losses that come with occasional, but inevitable,
down markets, stick with a money market fund or a short-term
bond fund. Bond funds tend to be less volatile than stock funds.
But depending on what kinds of fixed-income securities they in-
vest in—government bonds, corporate debt or mortgage-backed
securities, for example—they will vary in risk, return and volatil-
ity. Stock funds offer more growth potential than money market
or bond funds, but they come with greater risk, too.Performance and risk. Look for a fund with a three- and five-
year record, under the same manager, that beats its benchmark
and its peers. But dig deeper. Year-by-year returns may reveal a
nasty roller coaster ride. If you can, find out how the manager
performed during market corrections. How did that U.S. stock
fund you’re eyeing fare over the last three months of 2018, when
Standard & Poor’s 500-stock index lost nearly 14%? A look at
how a fund performed during good years and bad years can give
you an idea of its volatility. Can you sit through the downdrafts
without flinching?Fees. You’ve heard it before: Fees eat away at your investment
over time. A $10,000 investment growing 10% a year with a 1.5%
management fee translates into roughly $50,000 after 20 years.
But a similar investment in a fund with just 0.5% in expenses
would be worth more than $60,000. Keep averages in mind as
you scrutinize fund fees. The average U.S. stock mutual fund
charges 1.07% in annual expenses; taxable bond mutual funds
average 0.90%. Exchange-traded funds, available in HSA plans
that have brokerage windows, charge even less. U.S. stock ETFs
cost an average of 0.35% per year; taxable bond ETFs, 0.30%.mutual fund is available in
Fidelity’s HSA, the firm has
a list of good mutual funds
it recommends from a vari-
ety of firms.) Also, Fidelity
allows you to invest with as
little as $1 in your Fidelity
HSA. By contrast, many
HSA providers require a
$1,000 to $2,000 balance
in your account before you
can start investing.
Of course, you can re-
search investing HSAs on
your own. The HSA Search
tool (www.hsasearch.com)
lets you home in on plans
with investing options. The
HSA Report Card offers
insight into providers that
may be suitable for index-
fund fans, among other
features (http://thehsa
reportcard.com/the-top-
10-investor-hsas).
Focus on HSAs with low
fees. That includes account
fees the provider may levy,
as well as the expense ratios
of any underlying funds, says
Lauren Zangardi Haynes,
a certified financial planner
in Richmond, Va. “All of
these accounts and products
are making money somehow.
Figure out how they’re do-
ing it and decide if it makes
sense for you.”
Follow the investing rules.
Approach how you invest
your HSA dollars the same
way you would any other in-
vestment account. Consider
your risk tolerance and
time frame. “Treat it like a
401(k),” says Maria Bruno,
head of Vanguard’s U.S.
wealth planning research.
The longer your time hori-
zon, the more stocks you
can hold in your portfolio.
But money you need in less
than five years should be