Indexing, dollar cost averaging, and number of mutual funds

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.