Retirement Gets Closer Everyday
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.
Mutual fund advertisements tell you, usually in the finest of print "Past performance is no guarantee of future results." While that statement has always been true, now's a particularly good time to take heed. It's been an especially topsy-turvy time for fund managers and investors, which makes it that much harder to evaluate potential homes for your investment dollars. Which is not to say you should ignore a fund's recent performance if you want to add it to your portfolio. Just take it with a big ol' grain of sodium chloride.
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.
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.
It's important to keep in mind that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading below that price, i.e. at a discount to it's intrinsic value. The important point here is that when looking at stocks that are trading at or above their intrinsic value, the only hope for gaining value is based on future events, since the stock price already represents what the company is worth.
The choices can be overwhelming. You'll find index funds that mirror indexes focusing on small caps, mid caps, large caps, the global market, or social concerns. You will also find index funds that mirror bond or REITs indexes. Because the selection of index funds is so large, it helps to do some research or discuss such funds with a financial planner, broker, or someone you know who is knowledgeable about index funds. Indexfunds.com is a good place to start gathering more information.
The Nasdaq Composite: The NASDAQ is a heavily followed index that has a strong technology-oriented representation and includes companies such as Microsoft. A fund mirroring the NASDAQ 500 index will include all domestic and non-U.S.-based common stocks listed on the NASDAQ stock market. The index is capitalization-weighted.
Article Source: FxTradingStock.com
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by: George C. Lincoln
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Date: Thu, 27 Jan 2011
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