“Your Instant Portfolio; Do all the investment choices give you brain freeze? Here's the scoop on how to start with mutual funds”
Excerpts from AARP Magazine, Jan/Feb 2006 pp. 68, 70, 71, 93, 97 By Karen Hube
What is the biggest challenge to mutual fund investing? The usual answer is getting started. If you invest $20 a day in a portfolio earning an average annual 8 percent, you'll have almost $300,000 after 18 years. Here are five steps to start the process.
Step 1: Learn how mutual funds workMutual funds pool money from thousands of investors to buy a portfolio (think of it as a big basket) of stocks, bonds and other investments. Some funds have a focused portfolio, such as technology, health care or real estate. Others are widely diversified over a range of different types of stocks and bonds, such as international companies, small companies, large companies, corporate bonds and/or treasury bonds.
Mutual funds give you, the investor, access to a broad portfolio without your having to buy dozens of individual stocks and bonds to achieve such diversification. (You don't have to research individual stocks or bonds. Professional money managers do the research.)
Step 2: Strike the right balanceBefore you select your funds, you need to know what you are trying to achieve. How much should you hold in stocks, bonds or cash (money markets) ? The answer depends on how many years you have to invest before needing to draw income and how comfortable you are with temporary dips in your portfolio value. (This is your risk tolerance).
As a general rule of thumb if you're ten years or more away from retirement you should hold the majority of your portfolio in stocks – from 60 percent at a bare minimum to 90 percent, depending on your comfort level. (Remember to call Investment Consulting Group Inc. with any questions regarding your allocation.)
Step 3: Spread your bets aroundYou may be tempted to sink most of your money into a single fund that invests in a promising area of the market. Indeed if the outlook is good, why not? Here's why: because when that segment of the market hits hard times, your portfolio will too.
Instead, if you spread your money across a number of different kinds of stocks and bonds, you'll reduce your portfolio's volatility. Mutual funds make diversification easy. You can invest in a few funds that divide your portfolio between stocks and bonds and that give you a mix of investments in each asset class.
Step 4: Size up some fundsOne place to do independent research is to go to the Internet, where there are a variety of research web sites. Your local library is also a good resource. Remember as a participant in your retirement plan you can call Investment Consulting Group to get answers to your questions.
Step 5: Keep costs downLike any other business providing a service, a mutual fund company will charge your to invest your money. Your job is to make sure you're not paying too much. So when investing outside of your retirement plan, look to see if a fund has a “load” (a percentage to buy in or sell out of a fund) and the fund's expense ratio, which includes operational and management fees.
Step 6: Hang in thereOnce you have selected your mutual fund portfolio, you are bound to hear about a “hot fund” that has blown away its competitors. Or you'll see a market forecaster predicting that a particular market will be the next hot place to stash your cash. The temptation to sell one of your funds and follow the buzz may be overwhelming – but whatever you do, don't budge, at least not in the short term.
According to a 2004 study, investors in stock mutual funds who bounced in and out of their funds to try to “time the market” over the previous 20 year period had an average annual return of a negative 3.29% compared with the S & P 500's 12.98% gain.
The best way to earn steady returns is to stay in the market and invest systematically.
Items in italics contributed by Investment Consulting Group, Inc.
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