The Best Mutual Funds for Your Money

June 5, 2009

The best mutual funds is a common headline in many financial magazines, followed by a list of the top mutual funds by performance or the best mutual funds of the year.  While these lists of investments can be helpful when trying to put together a portfolio on your own; one of the biggest mistakes you can make is picking an investment of any kind before you do any due diligence.

This investing research pertains not just to mutual funds but also stocks, bonds, ETFs, etc.  It involves not only researching the investment but more importantly, honest research of yourself. We’ve all seen over the past year the disastrous results an investment decision can have if not properly researched and based on good information.

The following questions need to be answered before you ever type in a ticker symbol on a website or flips through the performance section of Barron’s Magazine:

  • What is my time frame?
  • What is my risk tolerance?
  • What is my objective?

Investing Time Frame

The difference between someone who is saving money to buy a house in 18 months, compared to another who is looking to use the funds for retirement 20 years away changes how an investment should be made. The general standard in the financial industry is that 5 years is considered long term. This timeframe is usually a suitable length of time to ride out any fluctuations in the market. The shorter the time frame from 5 years, the more conservative the investment should be.

Risk Tolerance

This tends to be the most difficult question an individual has to answer. The two biggest enemies to investing are fear and greed, and the both rear their ugly heads when trying to decide what will keep an investor awake at night. It is very easy to say someone is an aggressive investor when the stock market is up 30% in one year. The more important question is “how would you feel if that same investment was down 20% the next year?”

Investing Objective

Is the goal to put money in an investment and let it grow for 20 years or are income the priority? Could it be a combination of the two? Maybe capital preservation is what’s important?

Mutual Fund Research

Once you’ve answered these questions about yourself, you can begin to search for a mutual fund. Be careful where you look for information; there is so much “white noise” and advertising out there, it can be difficult to get an objective opinion.

A person also wants to make sure they are choosing a fund for the right reasons. There’s a saying in the financial industry…”Yesterday’s winners are tomorrow’s losers.” Just because a mutual fund was up 19% last year, it does not mean it is the right investment for everybody. Past performance should actually be one of the last reasons to choose a fund.

Tomorrow we’ll take a look at a resource you can use to find not just investment performance data, but a lot more mutual fund information to help you choose the best mutual funds for your money – Morningstar


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