You may have a portion, perhaps all of your assets in a stock mutual fund when market conditions are favorable. We want a mutual fund rather than a basket of individual stocks because

1) Many retirement accounts do not offer access to stocks.

2) We want the broad diversification available in a fund. A particular stock may miss most or all of a general market advance, but a fund with wide market exposure is likely to get a piece of the action.

3) Youll save on commissions, fees and other costs associated with jumping in and out of stocks. Most retirement accounts do not charge to move among stock funds, cash, bonds, etc.

4) Time. Investors tend to monitor their stocks much more closely than their funds, tracking daily movement, adjusting stops, adding to positions and taking profits. With funds, you follow the market directionand our adviceand move in and out of funds with a few mouse clicks at a web site or a short telephone call to your broker. That suits the majority of investors saving for the Golden Years.

So in our opinion its best to buy and sell stocks in a separate trading account and use mutual funds for your 401(k) and IRA.

Until recently, we suggested having some of your money in a small and mid funds as they were among the biggest gainers. At other times we suggest small large caps depending on the market leaders. Often we just throw our money into an index fund.

This is a fund that closely mirrors the movement of the overall market. If the DOW, NASDAQ and S&P 500 are on the rise, so will your index fund, and vice versa.

However, your retirement plan may give you a choice between two funds, an Index Fund and a Total Market Fund. You should understand the subtle differences between the funds before making your choice.

An Index Fund reflects the action in the S&P 500 while a Total Market Fund represents the Wilshire 5000 Index. The coverage in an Index Fund is broad since the S&P 500 includes almost every stock that moves the market. But the coverage of the Total Market Fund is even broader since the Wilshire 5000 includes ALL American companies, including many with international exposure. Therefore, the Total Market Fund is free of the risk of underperformance.

Dont get in a tizzy, though, if your account doesnt offer a Total Market Fund. The Index Fund is a legitimate substitute because The S&P 500 represents about 75% of the market capitalization of the Wilshire 5000. The returns on the two fund types are extremely close. Both have low expenses, plus tax efficiency because the annual distributions are minimal.

So you should feel at ease going into either fund when the situation warrants. And youll be comforted to know that most mutual funds have trouble matching the performance of funds tracking broad indexes like the S&P 500 or Wilshire 5000.