Top Ten Mutual Fund Tips
If there is anything you learn from this website, it should be these ten things:
- NEVER invest in a mutual fund that charges a load. These funds are for suckers. Whoever is trying to convince
you to buy them likely gets a kickback from the fund, which is why they are trying to pressure you into investing in the
fund.
- NEVER take stock advice from someone trying to convince you buy a mutual fund with a load. This person
clearly does not have your interests in mind. He is most likely just trying to line his pockets with kickbacks.
- Understand the fund's asset allocation. Don't invest in a "mixed" fund (one that invests in both stocks and
bonds) if you only want to invest in stocks. If you want international exposure, allocate some money towards international mutual
funds.
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Keep fees to a minimum. Obviously, you should avoid a load and 12 b-1 fees, but you also don't want to be
paying management fees either. A fund with an expense ratio under 1% is particularly lovely in today's environment.
- Don't invest in too many mutual funds. A mutual fund gives you instant diversification. Most funds invest in
hundreds of stocks. The only reason to invest in multiple mutual funds is if you want to target various types of stocks (such as
domestic and international).
- Consider an index fund. Most mutual funds underperform the market. You can essentially buy the market with an
index fund, which generally has maintenance fees of .25% or less.
- Keep track of the mutual fund's benchmark. Most compare mutual funds to the performance of the S&P 500,
but the S&P tracks the 500 largest US stocks. If, for example, you choose to invest in foreign small caps, then you will need
to use a totally different benchmark.
- Do not chase funds that have just had good performance. The fund itself may have just gotten lucky or may
just be targeted to an asset group that did well in the past year (for example, a health care fund when health care companies had a
record year). Also, funds that have had good performance might sometimes get a huge influx of funds and not know how to invest all of
these extra funds effectively, thereby detracting from future performance.
- If possible, invest in a smaller mutual fund. Large, ten billion dollar funds have a difficult time investing
in stocks. Just 5% of a ten billion dollar fund can buy many US small cap stocks. If this fund found a $500 million company it thought
was great, it could only invest a small amount of its total assets in the company without greatly affecting the price. I prefer to
invest in mutual funds that have $2 billion in assets or less, especially if the fund is focused on small caps.
- Never pay a load. Consider an index fund. Did I say that already? Well, I'll say it again because these are
the two most important points you should take away from this site.
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