Investing in mutual funds can provide you with three (3) key benefits:
1. Management – a key factor is that each fund has a manager. This manager generally studies the particular industry of the fund and watches all the potential stocks that the fund could buy or does own. The manager trades stocks within the fund to try and produce the greatest return with the most stability.
In effect a fund manager is a portfolio manager for a portion of your account.
2. Diversification – because a fund holds many stock positions the risk factor of losing your money is less in the respect that if one stock held by the fund goes down while the others continue to be stable or gain in value the losses sustained by the one stock are offset by the others.
Of course if the particular industry covered by the fund is suffering then the value of the fund itself will also decline.
3. Ease of Investing – because mutual funds trade based on each day’s closing prices (except for a few fund families) and they are less susceptible to major daily price swings you don’t need to be an intra-day or even a day trader to invest in mutual funds.
You can easily manage a retirement account or regular investment account by just examining your portfolio once a week or even just monthly.
Successful use of mutual funds still requires some common sense and time. Just buying some highly rated funds through a broker’s screener software doesn’t mean you can then stick your head in the sand and become a millionaire when you pull your head out 10 or 20 years later. Too many retirement accounts loss 40 – 60% of their value during the 2007-2008 recession.
Even when using mutual funds it is best to diversify and hold a number of funds, anywhere from four to eight would help provide a good mix. There are funds that cover just about any type of investment category whether it be a specific industry like energy or a type of company like large vs. small. There are also funds comprised of stocks known for issuing dividends and funds comprised of different type bonds that issue regular payments.
A portfolio based on mutual funds could contain, just as one example:
- Foreign fund, i.e. Latin America
- Large Cap fund
- Small Cap fund
- Energy fund
- Consumables fund
- Hi-Yield Dividend fund
- Mid-Term Gov bond fund
One thing to be careful of in putting together a portfolio based on mutual funds is to not duplicate. Don’t pick similar funds from different mutual fund families. This not only reduces your diversification and extends your risk factor but also limits your potential for profit.
Selecting and monitoring mutual funds can be accomplished easily in a variety of ways:Use your broker’s online screener
- An investment software program that not only helps you pick funds based on performance but also signals when to sell them
- Magazine articles and issues that rate and categorize funds (just remember that such articles are usually based on information that is anywhere from one to four weeks old