Mutual Funds

Mutual funds is where most people end up for their investments, either through their 401k plan from work or their IRA. They don't know much about investing, and this is probably the best return if you choose the right mutual funds. However, there are tens of thousands of mutual funds and over 40,000 stocks out there. There are also hundreds if not thousands of newsletters and investment reports. Who can make a good decision with those kinds of choices? Well, the place to start is www.morningstar.com. Most of the information is free and it's dependable. They are an independent rating agency that will review the essentials of companies and mutual fund managers. The top rating is 5 stars and the lowest is 1 star. Obviously, you would want to choose selections with the highest ratings.

Mutual funds offer people the easiest choice for diversifying their portfolio. The fund manager selects many different stocks, bonds, and money market instruments based on predetermined criteria specified in the prospectus. This document describes the mutual fund in detail, from management fees, withdrawal rules and surcharges, track record, fund manager history, financials, and selection criteria for investment selection. The style of investments are also important. There is a 9 square grid box that determines where the investments will be made. Along the side are large, medium, and small companies, along the bottom is value, blend, and growth. Some managers will select large value companies, some small growth companies. The key is to select some in a variety of styles to level out performance. Nearly every year, a different style offers the best return. You won't know ahead of time, so if you have much of the grid covered, and high rated funds, you ought to do pretty well. Good mutual funds will average 6-12% per year. Look for ones that perform consistently in their 1, 3, 5, and 10 year time periods. New funds are usually more risky because their track record are incomplete. Since the best returns vary from year to year, don't chase the area that did the best last year, because it likely won't repeat.

Turnover ratio is also important when selecting mutual funds. The turnover ratio measures how frequently stocks and bonds are sold within the year. The more transactions, the more taxable events and commission costs occur for the fund and subsequently lowers overall return. However, in down markets, the manager may be dumping underperforming stocks before the losses become too great.

The sector percentage is also relevant. If the percentage in one industry is high (over 20%) and the industry goes through a decline, the overall returns will be brought down. Again, the prospectus will outline the selection criteria.

If you leave your investments to others, make sure you do your homework. A little investigation and due diligence can make a huge difference over time.

The lips of the wise spread knowledge; not so the hearts of fools. Proverbs 15:7

More investment vehicles are coming. Stay tuned ...