Author: Justin Lukasavige
We've spent the past few weeks discussing investments so you'll know by now that we recommend good low risk mutual funds as the investment of choice.
There are a variety of things to look for in a mutual fund before you invest. As mentioned before, the stock market has averaged nearly 11% during the past 70 years. Depending on how aggressively you invest your money, I think you can generally count on a rate of return somewhere in the 10% - 12% range.
Now, what to look for in a mutual fund...
I usually recommend an index mutual fund for most of your investments. An index fund tracks a specific index, such as the S&P 500, which are the largest 500 stocks on the New York Stock Exchange (NYSE). Most index mutual funds do not have specific managers that are in charge of the fund, but rather are mostly automated in their day-to-day operations. If the fund does have a manager, it is important to note that he should have a long track record of good returns on that fund. If that manager or management team has only been with that fund for the past year or so, there is not much chance that the returns will continue to be what they have been over the past few years.
Another important number to look at is the expense ratio. It is fairly easy to find a fund with good returns and expenses less than 1%. The lower the better, but remember, if you buy a fund with an expense ratio of 1.5% that returns 12%, it would be better than a fund with expenses of .5% that returns 9%.
Usually I find that most people only care about one particular number; the past returns of a fund. While this is great information to be armed with, I always caution that past performance is no guarantee of future returns. That is especially true if a new manager is on the job.
An excellent website for free mutual fund research is Morningstar. In addition, they also have a free investor's classroom which contains some great information about not only mutual funds, but also stocks, bonds and other investments. In general, we suggest to start out small with a single mutual fund covering a broad range of the stock market, such as small and large companies as well as international stocks. When you have over $10,000 in investments, you can start branching out to ideally hold 25% in International, 25% in Aggressive mutual funds, 25% in Small companies, and 25% in large companies that pay dividends.
Tags: Money, Investments, Mutual Fund
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