Mutual Funds For Dummies
When I invest my own money, I've long used the best mutual funds. To make the most of your money when investing in funds, you should be sure that you have your overall finances in order. You should also understand what works and doesn’t work and what will maximize your chances for success and minimize your chances of problems in funds. The following themes will guide you well in your journey.
Copyright © 2010 Eric Tyson All rights reserved.
Keeping the Big Picture
Fix your finances first. Before you invest in mutual funds, look at your overall financial situation, set goals, and take advantage of other good investments, such as paying off high-cost consumer debt and using your employer’s tax-deductible retirement savings plan.
Don’t underestimate the power of saving and regular investing. These habits are far more important, valuable, and achievable than your ability to choose tomorrow’s top mutual fund performers.
If you need assistance with your finances or investment decisions, hire conflict-free advisors. Competent advisors who sell their time and nothing else are far more likely to have your best interests at heart.
Always consider the tax impact of your fund-investing decisions. What matters is the return you get to keep (after tax returns), not your return before paying taxes.
Get your priorities straight. Remember that the size of your fund portfolio has little to do with your overall happiness. Don’t forget to invest in your health, family, and friends.
Use mutual funds. Funds offer a low-cost method of investing in bonds and stocks, and you get a professional, full-time fund manager on your team. Understand the pros and cons of funds and alternatives (for example, exchange-traded funds, hedge funds, picking your own stocks and bonds) before investing.
Don’t expect guarantees. You can be logical, analytical, and sensible and still end up with some mediocre funds. Fund selection isn’t a science.
Consider the source. You can increase your chances for success by sticking with ethical fund companies that have a history of producing winners with your type of fund.
Pay attention to fees. Avoid funds that charge sales commissions (loads) and have high ongoing operating expenses. You have more than enough commission-free (no-load), low-expense funds with great managers and track records as alternatives.
Beware of buying only past performance. Historic performance is but one of many factors to consider when selecting funds.
*Remember the power of index funds. Index mutual funds, which match and track the performance of a broad bond or stock market index, handily beat the vast majority of actively managed funds.
Diversify. At a minimum, invest some of your long-term money in stock funds, both U.S. and international, as well as bond funds. If your assets allow, use at least two funds within each category.
Give up the guru search. No one can predict which mutual funds will rise and fall the most. If someone has figured out a new sure-win system, they’re not going to share it with you and me.
Don’t overestimate the value of finding tomorrow’s stars. For more than ten years, the best fund managers beat the market averages by a small margin each year.
Monitoring Your Funds and Portfolio
Keep a long-term perspective. Once a month or even twice a year is the most you need to check in and see how your funds are doing. Following your investments too closely may tempt you to make unwise decisions.
Buy when the financial markets are on sale. If you’ve chosen wisely, don’t dump your mutual funds when they’re down. Buy more (or at least keep buying!). Be patient — just as when bad weather hits, things get better with time.
Don’t try to time the markets. Shifting money around — into and out of mutual funds based on the latest news or pundit’s predictions — is almost certain to reduce your investment returns.
Make fund investment decisions that fit with your goals. If your situation significantly changes or your fund’s performance is much worse than its peers, consider making some changes.
Compare your funds fairly. Evaluate the performance and cost of your mutual funds against funds and indexes that are truly comparable in terms of types of securities they hold.