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Indexing, dollar cost averaging, and number of mutual funds

By David Luhman on Sat, 05/09/2009 - 23:54

Indexing, dollar cost averaging, and number of mutual funds

When selecting funds, use index funds as the foundation

So by now you're ready to get down to the nitty-gritty of selecting which mutual funds to invest in. Before I lose you in a sea of funds, let's talk a little about the fund selection process. With over 6,000 funds, it's easy to get lost.

As you can probably tell, I believe that financial markets in the United States are fairly efficient and that you can't beat market averages without taking on additional risk, so low-cost index funds probably should be the foundation of your portfolio.

Don't buy too many funds

But your portfolio doesn't need too many funds. If you have less than $10,000 to invest, you probably should own no more than two diversified funds.

If you have $50,000 to invest, four diversified funds might be plenty, and with $100,000 you might want to expand to six funds. Anything above that simply creates a paper work hassle and doesn't gain you very much.

How to not buy funds

But even if you invest most of your money in a few index funds, you may want to select some actively managed funds as well. When shopping around for an actively managed fund, don't invest in a fund simply because it has an ad that says that it's the number one fund in it's category. Here's why.

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