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Chapter 14. Betting on the Right Horse > Match Your Investor Profile to an Inve... - Pg. 144

Betting on the Right Horse 144 An investment index (or indices, if using more than one index) follows the activity of a representative sample of investments. Indices act rather like a pace car in auto racing. There are indices for just about every type of investment--big, medium, and small companies; bonds, balanced funds; money-market funds; and so on. For example, the S&P 500 is a statistical sampling of the U.S. stock market as a whole. It is not surprising, then, that the S&P 500 Index is often referred to as "the market." Some mutual-fund families sell funds based on different indices. And because the manager does not have to do much (we call this passive investment management), his expense ratios are very low. Other managers sell a more hands-on style of management. They charge you more for it, so you should expect them to beat the market. Unfortunately, very few managers ever beat the market. Building an Investment Strategy Look at these different portfolios. What do you notice? The more aggressive the portfolio is, the higher the average annual return is. After all, the more money you put into the stock market, the greater the return you should expect. What about the best years and worst years? Notice that the highs get higher and the lows get lower the more aggressively you invest. Now let's say that our sample employee, John Dough, is a moderately aggressive investor who prefers using all the funds in his 401(k) plan. Let's also assume that John's 401(k) offers nine funds like the ones we have listed later in this chapter. Now follow along as John develops his own in- vestment strategy. Step one.Go to Figure 14.2. Write in your target rate of return at the top of the page. This is the number that you used back in Chapter 5 to calculate how much you need to save. This rate will keep you honest as you select the right portfolio.