Sarah Neudorf February 23, 2020 Mutual Fund
Sometimes it is just a lot easier to pick fabulous mutual funds, and let professional money managers make the individual stock selections for you. If you go this route, and for many it is the way to go, than I suggest your big decisions are what sectors you want to invest in, and what are your asset allocations. Sounds like fancy language, but really it is not. It is just plain common sense investing. What is your aversion to risk? Do you want to embrace investment risk, or do you seek to encounter as little risk as possible.
Picking mutual funds is a challenging task. You will need to spend time learning, researching, investigating, analyzing, and comparing. The key is to develop your own methodology using some of the components listed here along with your own judgment and decision capabilities. Review your investment plan and fund selection criteria at least once a year. Make sure the plan still matches your goals and the funds match your expectations.
Dismiss recent results Past performance is no indicator of future results. No truer words could ever be spoken and they are included in every mutual fund advertisement. But it is extremely difficult to ignore these numbers which the fund companies conveniently place in big bold letters - immediately above the fine print warning us. Nothing is more attractive than a fund with a great record, especially given the dismal performance in the market.
The main advantage of active management is that quality managers use their experience, analytical skills and economic research to help find undervalued investments that are ready to out perform the market. They can focus their buying on the areas that they find most attractive and sell or avoid those that are under-performing. An active manager can take advantage of market dips to buy or sell as necessary which can add value to your investment.
As you can see, there are many reasons why market timing of mutual funds can be a difficult task. It is better to use an asset allocation model and adjust your allocations as needed. While most stock investors that trade or time the market usually lose money, most fund investors tend to make money over time. So select quality funds that meet your objectives, adjust your allocations and let the markets work to your advantage.
Many investors try to play the game of picking individual stocks rather than picking solid mutual funds and then often wonder why they experience both difficulty and stress making money in the stock market. I tell investors that they should not be afraid to own individual stocks if they are willing to take the time to learn enough about the individual company or stock to make a rational businessman`s decision. And do not forget about valuation.