Mutual Fund Strategies

Mutual Fund Strategies

Index funds should be the foundation of your portfolio

Dollar cost averaging - the best way to invest over time

The right number of funds to buy

Index funds should be the foundation of your portfolio

Why index funds are a good foundation for long-term investments

Gain diversity by investing in a broad index

You'll save on expenses

You'll probably beat 75 percent of other mutual funds

You won't be frightened out of stocks

The market as a whole may still go down, but probably not as far as an aggressive fund, so you'll probably stay with the index fund for the coming recovery in prices

Here's a good place for new investors to start saving for retirement

Invest in a balanced fund or a low-cost fund of funds that uses indexes to invest in a number of asset classes

Dollar cost averaging - the best way to invest over time

Allows you to diversify over time

Example of dollar cost averaging

Assume you invest a $200 every other month into an IRA

Market goes up then down

Month	Amount invested	Share price	Shares bought
Feb.	$200	$7.00	28.57
Apr.	200	10.00	20.00
Jun.	200	13.00	15.38
Aug.	200	13.00	15.38
Oct.	200	10.00	20.00
Dec.	200	7.00	28.57
	Total $1,200	Avg. $10.00	Total 127.90

Note the average share price for the year was $10.00

But, if you use dollar cost averaging, your average cost per share is only $9.38

$1,200 / 127.90 shares = $9.38 / share

Why?

By buying more shares when the price is down, you lower your average cost per share

If you've heard the phrase "Buy low, sell high", dollar cost averaging is just another way of saying

Buy more _low, buy less ^high

But note that dollar cost averaging works best inside a retirement account

If you use dollar cost averaging outside of a retirement account, the effect of investing many times in small amounts will complicate your capital gains tax calculations

The right number of funds to buy

Depends on how much you have to invest

You want to have diversification without a lot of paper work

Realize that owning two or more funds of the same asset class isn't a good idea

More paper work

If you already own a US small company stock fund, adding another won't really give you additional diversification

Need a different asset class if you really want diversification

Buy something like a convertible bond fund instead of another small company stock fund

Suggestion if you have under $10,000 to invest

• One money market fund for cash management outside of retirement accounts
• One balanced fund for retirement

  The balanced fund should have some money in foreign stocks

Suggestion if you have $10,000 to $50,000 to invest

• One money market fund for cash management outside of retirement accounts
• One bond fund
• One balanced fund
• One stock fund

  Your funds should give you exposure to a variety of domestic bonds (US Treasuries, junk, GNMA)

  Your funds should have some money in foreign stocks

Suggestion if you have over $50,000 to invest

• One money market fund for cash management outside of retirement accounts
• One bond fund
• One large company stock fund
• One small company stock fund
• One foreign stock fund
• One fund for speculation

  Your funds should give you exposure to a variety of domestic bonds (US Treasuries, junk, GNMA)