Selecting Mutual Funds

Selecting Mutual Funds

The worst way to select funds

The biggest mistake I see beginners make

The best way to select funds

Good funds to consider if you're just starting to save for retirement

The worst way to select funds

Open up a magazine like "Money" and throw your money at the top-performing fund

Investing in yesterday's winners is a good way to pay more than you need to and to open yourself up to poor returns

You need to consider the time horizon for your associated financial goal

You also need to consider the tax implications associated with selecting a particular fund

Tax implications are probably more important than any small gain you might get by selecting the latest hot fund

The biggest mistake I see beginners make

They invest in an aggressive fund that was yesterday's winner

The fund then gets hammered

The burned investor sells and vows not to invest in "risky" stocks for the next few years

The problem with this

The investor has suffered a short-term loss, but the greater loss is being out of stocks for many years

To accumulte wealth, you need to have a fair amount invested in stocks

Avoiding stocks is the best way to get nowhere

The best way to select funds

Select funds to match your goals

Long-term goals (retirement, colege funding for small child) imply long-term investments

• Stocks
• Long-term bonds
• Real estate (your home, rental property or real estate mutual fund)

Short-term goals (down payment for home, colege funding for teenage child) imply short-term investments

• Money market mutual funds
• Short-term bond funds
• Bank accounts or CDs

Good funds to consider if you're just starting to save for retirement

If you need a fund for a long-term goal like retirement, and you're new to the mutual fund investing game, consider investing in a balanced fund

Balanced or hybrid funds invest in a mixture of stocks and bonds

A mixture of 60 percent stocks and 40 percent bonds is typical

By investing in a variety of different assets, you can increase your return while reducing your risk

Studies have shown that a mixture of 90 percent bonds and 10 percent stocks is actually less risky and offers higher returns than investing fully in bonds

Balanced or hybrid mutual funds

Most hybrid funds offer good, steady returns with reduced price volatility

There are three types of hybrid funds

• Asset allocation
• Balanced
• Fund of funds

Asset allocation funds

Dynamically change percentage invested in stocks, bonds and money market securities

Try to time the market

Can be more volatile than a balanced fund or a fund of funds

Balanced funds

Typically invest in a fixed percentage of stocks and bonds

Fund of funds

A fund which invests in the shares of other investment companies

Can charge double the management fees -- be careful to avoid this

Fund of funds have a bad reputation from the 1960s when charging double the management fees was common

But there are several good fund of funds that have low management fees