Investing In What You Know And Believe
Conversely, an older couple, nearing retirement
, may opt for the reverse calculations, looking for 80 percent of their mutual fund investments to be in income-generating, safer funds. They want income soon and are not in a position to take risks.
Of course, the above examples are broad generalizations. However, by creating your asset allocation blueprint you will then be able to select fund categories that fit appropriately and allow you to diversify. By diversifying across sectors, caps and fund categories, you lower your overall level of risk.
By diversifying across sectors, caps and fund categories, you lower your overall level of 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. 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.
Once you have a particular fund in mind, check with Morningstar Inc. or another fund-rating agency to see how the fund compared with its peers over one-, three-, five- and 10-year periods. If its annual returns are not in the top half of all funds in its category over most, if not all, of those time periods, this investment is a nonstarter. Walk away. If it is in the top five deciles-top 50 percent -- over all or most periods, look into it a little further.
Once you have a particular fund in mind, check with Morningstar Inc. or another fund-rating agency to see how the fund compared with its peers over one-, three-, five- and 10-year periods. If its annual returns are not in the top half of all funds in its category over most, if not all, of those time periods, this investment is a nonstarter. Walk away. If it is in the top five top 50 percent over all or most periods, look into it a little further.
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.
by: Arthur McCain
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