Investing With A Little Common Sense
Today, with more than 10,000 mutual funds to choose from, you can be sure there is a fund (or several) with your name on it. However, rather than seeking a fund or even a fund category, you should first determine how your portfolio should be set up.
If you determine your overall investing position based on goals and timeframe, you can lay out a strategy. For example, a young couple, without children, who have a high combined income, can be aggressive in their choices. They may opt to put 80 percent of their investment dollars into riskier, aggressive funds and the remaining 20 percent into more conservative fund investments. They have time on their side and are not averse to taking some financial risk.
In a sense, a good investor is doing at some level what a fund manager does by choosing diverse investments so that, if one does poorly, the others will more than make up for it. In the late 1990s the technology funds were the rage. If you were willing to take the risk and bank on tech sector funds (and knew when to get out), you could have made a lot of money.
While no one sector is flying at that level today, you can take a more aggressive approach by looking at overseas markets and small cap, mid cap and emerging growth funds. In the more conservative portion of the portfolio, you?ll want funds with the large cap blue chip stocks, large cap value funds, income funds and bond funds.
By having a small piece of all, or nearly all, of the stocks in a particular index, there is less risk than there would be by selecting an actively managed mutual fund. In addition, another major plus of an index fund is that the expense ratio (cost of running the fund) will be lower than an actively managed mutual fund because there are very few transactions or management decisions to be made.
Look, too, to see how long the fund manager has been on the job. After all, a 10-year track record isn't worth much if the manager has been making the investment decisions for only three of those years. The stock picker doesn't matter if you opt for an index fund, of course; and it matters less at big, process-oriented companies like Fidelity or American Funds. But a manager's tenure and performance are generally your best window into how a fund will behave in the future.
Index funds can and often will outpace many of the managed funds during a bull market. In 1998, for example, some 80 percent of the funds designed to beat the S&P 500 did not succeed, making index funds a good choice. In a bear market, however, a good fund manager can be advantageous since the index fund will obviously drop. Of course, as is typically the case, over time, equities, equity funds, and the indexes can rebound, and in the long term such funds should be good investments.
The Russell 3000 Index: The Russell 3000 Index represents more than 98 percent of the U.S. equities market. It is completely reconstituted each year to maintain an accurate picture of the market. An index fund mirroring the Russell 3000 covers a broad spectrum of equities.
Article Source: FxTradingStock.com
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by: Arthur McCain
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Date: Tue, 31 Aug 2010
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