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You are here: Stocks Investing Guide >
Mutual Funds > Choosing a Mutual Fund |
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Choosing a Mutual Fund
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There are mutual funds
all over the place—over 6,000 of them. Some are
bad, many are good; a few are terrific. The fact
is that some are consistently better than others,
but it's more likely that your fund will have a
good year, then one that's less than stellar. Like
all things connected with the economy, your
investments are going to move up and down. Over
time, the stock market consistently brings in a
return of around 10% , but that's not from year to
year, but over a lot of years. Mutual funds tend
to do somewhat better; around 13%.
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Probably the best way to choose a fund is to look for
one that's been around while and that has a good track
record. If it's had the same fund managers for a long
time, say ten or fifteen years, that's a pretty good
sign, too. Most financial advisors advise against
getting a fund that's centered on one sector, with the
idea that funds that spread their money between a lot of
different sectors will suffer fewer losses when a
particular arena of industry takes a big hit. Obviously,
if you have all your money in a real estate investment
trust (REIT) and real estate takes a big tumble, you're
going to wish you had some in pharmaceuticals or oil or
something not related to buildings and land. If you're
like some people, the idea of investing in oil is
anathema to you, in which case finding a mutual fund is
going to be a bit tougher because most of them have some
portion of their holdings with major oil companies. But
it can be done.
Mutual funds can be made up of any assortment of
financial products, including stocks and bonds. Bonds
are usually found at the bottom of the investing
pyramid. Government bonds and Treasury bills tend to be
very safe, federally insured, and you know what you'll
get and when because they mature after a definite period
of time. Some mutual fund managers provide a stable
component to the funds by buying nice, solid bonds along
with flashier things like stocks. Some funds specialize
in large-cap, medium, small or micro-cap corporations,
and others mix them up to provide the variety so dear to
the bet-hedging investor's heart. Some mutual funds,
like all investment products, are geared toward
"growth", which means they are a bit riskier but may pay
off a bit bigger than "value" products. If you choose a
fund that focuses on "value" over growth, you may see
smaller returns as well as smaller losses. High growth,
or aggressive growth funds take a few more chances, so
when they pay off, they pay off a little better.
Whenever you invest, you're balancing your capacity for
risk with your need for security: mutual funds do the
same.
- Choose your mutual fund by its track record over
time.
- Has it consistently brought in a return of better
than 10%? Has it been around awhile? Get a no-load
fund with a 12b-1 of less than .25%.
- Don't pay commissions, even if a broker tries to
tell you a particular fund will make you more money if
you do.
- Read as much of the prospectus as you need to, to
know the top ten companies the fund invests in.
If for some reason you invest in a new mutual fund,
you will probably have a banner year, followed by
something much more realistic and disappointing the next
year. If you look at the history of various mutual funds
since inception, you'll notice that most of them do
extremely well the first year, which makes sense. After
all, when companies first "go public", they have
garnered their resources and are doing everything they
can to look like a great investment. Once they have some
investors, it's time to start spending money on things
like sales managers and coffeemakers and restrooms so
they don't have to run down to Starbucks three times a
day.
Most brokers know that brand-new mutual funds aren't for
the faint of heart or for the novice investor, and will
try to guide you to established, conservative (in
finance, not necessarily in politics) funds that will
systematically make solid little bits of money year
after year. Remember, in investing, "boring" is good!
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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