Mutual Fund Advice
How Both Beginners and Experts Choose the Best Funds
Which are the best mutual funds for you? How do you know which funds to buy and where do you find them? Should you use an investment advisor or financial planner? Or should you do it yourself?
Although mutual funds are one of the most accessible and simple investment types for investors of all experience levels, there is no such thing as one-size-fits-all investment advice. This is why there are countless books and websites offering ideas and tips on how and where to invest in mutual funds.
In this article you will be given both general and specific ideas, along with links to other information on mutual fund investing. After reading this article you may be able to decide if you want to use an investment advisor or if you want to do it yourself.
What is Your Investment Objective?
What is the purpose of your money? What do you want it to do? How much time do you have until you need this money? How much risk are you willing to take to achieve above-average returns? Do you want your money to grow or do you want to preserve it's current value?
Determine Your Asset Allocation
Once you determine your investment objective, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance). The higher your risk tolerance the more stocks you will have in relation to bonds and cash in your portfolio; and the lower your risk tolerance, the lower your percentage of stocks in relation to bonds and cash.
Learn the Types and Categories of Mutual Funds
After forming the basic structure of your asset allocation, you can begin to explore the various types of funds and their respective categories. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories, such as foreign stock, large-cap stock, small-cap stock, corporate bonds, treasury bonds, and so on, that further describe the investment style of the fund.
Learn How to Analyze a Mutual Fund
There are many features, aspects and categories of mutual funds. However there are a few basic things to know, such as how to analyze mutual fund performance and things that can affect performance, such as the fund's expense ratio. However, there is much more to fund selection than just performance and expenses. For some do-it-yourselfers and investment advisers alike, the passive style of index investing makes the job of analysis much more simple.
Educate Yourself on the Best Investing Strategies
There is no "best investment strategy" except the one that works best for you. Also you don't want to begin a strategy and find that you want to abandon it for some hot new trend you discovered in a magazine article. Don't get confused by all of too-good-to-be-true strategies of the month and stick to the time-tested basics.
For example, if you don't like research and analysis and you want to keep things simple, an easy, low-cost lazy portfolio strategy might work best for you. But if you do like watching the market and analyzing things, you might like fundamental analysis or tactical asset allocation. So investing styles and tactics are like the clothes that fit you best. You don't need anything expensive or tailor-made; you need something comfortable that will last a long time, especially if your investment objective is long-term (10 years or more).
Learn How to Build a Portfolio of Mutual Funds
Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features.
To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs. An example of such a simple design is called core and satellite.
Invest in the Best No-Load Mutual Funds
Without a doubt, no-load funds are the best choice for both the do-it-yourself crowd and the best investment advisors. But what are the best no-load funds and where can they be found? With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes.
Most investors know to avoid mutual fund loads if they want to maximize returns by minimizing mutual fund fees. Many investors also know how to choose the best funds. However, the wisest investor knows that simplicity, in addition to frugality, is a powerful virtue in the art of mutual fund selection: All that is needed to build the best mutual fund portfolio is to choose one good no-load fund family and select five or six of their no-load funds from different types of mutual fund categories.
Decide: Do It Yourself or Hire an Advisor?
Whether you do it yourself or choose an expert for financial advice, you are choosing an advisor. Start the decision process of hiring an advisor by asking a few reflective questions: If a friend needed an advisor, would you recommend you? Do you want to hire you as the advisor or do you need to hire someone else? What is the value of your time compared to the monetary cost of using an advisor? Do you enjoy the process of investment research and financial planning or do you dread doing it to the point of neglecting your finances?
Learn About the Types of Investment Advisors
If you decide to hire an advisor, which will best serve your financial and investing needs? Should you use an RIA or is a stock broker best? What is a CFP and what is the advantage of using them?
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.