Should you invest in mutual funds? If so, how do you choose among all of the options?
In The Wealthy Barber, author David Chilton advises you to invest 10% of your income for long-term growth. This money should go into index or mutual funds. He recommends a particular type of mutual fund and provides advice on selecting one.
Here are some mutual fund tips from David Chilton and a few others.
Mutual Fund Tips
A mutual fund is a professionally managed pool of many people’s money, which is invested in an array of stocks, bonds, and other assets. Individuals own shares in that portfolio. Chilton advises that you put your 10% savings in equity-oriented mutual funds.
(Shortform note: Equity-oriented mutual funds, or equity funds, are funds that invest mainly in equity shares of companies (stocks).)
Besides diversification and professional money management, there are a few other advantages to equity mutual funds, according to Chilton. First, they are hands-off: You don’t need to constantly research individual stocks or make decisions about buying and selling. Second, they make use of dollar cost averaging: You invest a fixed amount of money in stocks at regular intervals. With this approach, when stock prices are up, your money buys less, but when they’re down, your money buys more. So market downturns can work to your advantage: In the long run, your average cost per share will be lower than the average price per share.
Chilton offers some mutual fund tips so you know how to choose among the options:
1) Check out the manager’s record: Look at the fund manager’s past record: What is their average return over five years, 10 years, etc.? Has the fund performed consistently over time (as opposed to fluctuating wildly)?
2) Do your research: Read magazines that monitor mutual fund performance (Forbes, Worth, Kiplinger).
3) Pick a diversified fund: Buy a global fund that invests in both foreign and US securities across many different industries.
4) Don’t try to second-guess market or industry fluctuations: Avoid “market timing” and “sector-fund-switching,” which involve switching your money in and out of stocks or from one industry sector to another based on predictions about market fluctuations or industry rise and decline.
5) Watch your commissions: Keep an eye on the commission or “load” you’re paying for your fund to be managed, and make sure it comes along with good advice or is attached to a high-performing mutual fund.
|Choose a Mutual Fund With Care|
In The Intelligent Investor, Benjamin Graham offers similar tips for choosing a mutual fund, but he places more emphasis on being skeptical of funds that charge high fees and commissions. He points out that the higher the fees, the more the fund has to outperform the market for you to be in line with the market.
Others caution against relying too heavily on average mutual fund returns or global funds. In Money: Master the Game, Tony Robbins argues that average returns are misleading because they represent the average percentage of yearly net gains and losses, not how much you’ll actually get in returns, which will depend on your monthly contribution and variations in the market. And many investors recommend avoiding the risks inherent in foreign markets by investing only a small portion of one’s portfolio in global stocks.
Finally, in A Random Walk Down Wall Street, Burton Malkiel advises, don’t try to “beat the market” by trading frequently. He cites a study examining accounts at a discount brokerage, which found that the more frequently individual investors traded, the worse they did.
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