What are mutual funds? Mutual fund is a diversified portfolio of stocks managed by a professional investment company, usually for a small management fee. When you purchase a mutual fund means you are buying a long-term professional management to make decisions for you in the stock market.
Mutual fund is different from stocks. A stock may decline and never come back in price but a well-selected, diversified domestic growth-stock fund always recover from the steep corrections that naturally occur during bear market.
Many people do not know how mutual fund works and thus earn nothing throughout years! The first thing to understand is that the big money in mutual funds is by owning them through several business cycles(market ups and downs). You have to sit tight for long with enormous patience and confidence. Just like buying a house, if you nervously sell it out after three or four years, you may not make anything.
This is because the way to make a fortune in mutual funds is through compounding. That is, your earning themselves (the performance gains plus any dividends and reinvested capital) generate more earnings, allowing you to put ever-greater sums to work. The more time that goes by, the more powerful compounding becomes. If you purchased $10,000 of a diversified domestic growth-stock fund that averages about 15% a year over a period of 35 years, you may make a fortune of $1.28 million!! Over any 20- to 50-year period, your growth fund should average two to three times what a savings account would return. It’s definitely possible!
Now, how to pick a right fund? Always look for the fund that:
- Performed in the top quartile of all mutual funds over the last three or five years (it will probably have an average annual rate of return about 15% or 20%);
- Have outperformed many other domestic growth-stock funds in the latest 12 months;
Always consult a reliable source for this information such as some investment-related magazine, your stockbroker with special fund performance rating services and Investor’s Business Daily is quite a good reference.
How many funds should you own? In 15 years, you might have hefty amounts in two or even three funds. However, don’t overdo it, there’s no reason to diversify broadly in mutual funds.
But what is the right time to buy a fund? The answer would be: Anytime is the best time. You’ll never know what the perfect time is, and waiting will usually result in your paying a higher price. You should focus on getting started and becoming regular and relentless about building capital that can compound over the years. It’s best to also make a larger initial purchase that will get you on the road to serious compounding all that much quicker.
Don’t let the market diminish your long-term resolve. Bear markets can last from six months to, in some rare case, two or three years. Have the vision to build yourself a great long-term growth program and stick to it. A successful long-term investor in mutual fund will need the courage and perspective to live through many discouraging bear market. Each time the economy goes into a recession, consider adding to your fund when it’s 30% or more off its peak. If you are passion, the price should be up nicely in two or three years.
Management fees and turnover rates
Some investors spend a lot of time evaluating a fund’s management fees and portfolio turnover rates, but in most cases, such nitpicking isn’t necessary. You can’t be successful and on top of the market without making any trades. You should hire a good fund manager to help in fund management as they will sell a stock when they think it’s overvalued, and find another, more attractive stock to purchase. Also, the institutional commission rates that funds pay are extremely low–only a few cents per share of stock bought or sold. It’s the fund’s overall performance over several years that is key.
Why are those people fail in mutual fund investment? The five most common mistakes mutual fund investors make:
- Failing to sit tight for at least 15 years or more.
- Worrying about a fund’s management fee, its turnover rate, or the dividends it pays or buying new funds or last year’s #1 fund
- Being affected by news in the market when you’re supposed to be investing for the long term.
- Selling out during bad markets or switching funds too often.
- Being impatient and losing confidence too soon.
Other mistakes:
- Buy the best-performing fund after it’s had a big year.
- Switching (usually at the wrong time) to another fund that someone convinces them is much safer or that has a “hotter” recent performance record.
Remember, the super-big gains from mutual funds come from compounding over a span of many years. Funds should be an investment for as long as you live. They said diamonds are forever, so buy right and sit tight.
