Question of the week:I was really burned by a couple of mutual funds that I owned over the last couple of years, but I think I'm ready now to give funds another try. What should I do to make sure I don't repeat my mistakes? --CSC
Dear CSC,
Like you, lots of people these days are putting their money back into mutual funds. According to the Investment Company Institute, the mutual fund industry's trade organization, stock funds had an inflow of over $16 billion in April.
And like you, people are still smarting from recent experience with the stock market in general and mutual funds in particular. When we asked Armchair Millionaire community members about their regrets investing in funds, we definitely heard a common theme. These two responses were typical:
Too much tech. "My biggest mistake was investing in a heavily weighted high tech fund just before it had a 100 percent yearly gain and then watching it plummet from $78 a share to $8 in two years." --EA
Too much tech, too. "My mistake was buying into a tech fund right at the peak of the market and then having to sell to avoid a huge taxable distribution on the fund, even though I was losing money left and right." --Steve
Mutual funds are designed to make it easy to invest, but that doesn't mean that you should buy them and then just forget them. Fortunately, it's not difficult to monitor your funds. Whenever you invest in a fund, you'll receive fund reports delivered to your mailbox at least twice a year. Not only will these reports tell you how your fund is doing, they'll help you know if the fund is still the right investment for you. My guide provides the questions you should ask as you're reading your mutual fund reports.
The Armchair Millionaire Guide to Keeping an Eye on Your Funds
- How is it doing? The report will tell you the fund's performance over the last six months or year. Compare this against the market benchmark that's appropriate for that fund. For example, you'd check large-cap funds against the S&P 500 Index and small-cap funds against the Russell 2000.
- Is it doing what it said it would? If you bought a fund because it was investing for value in small-cap companies, for example, make sure it's still following that style. In search of better investment opportunities, it's not uncommon for fund mangers to stray from the stated investment strategy of their fund.
- What is it investing in? Each report will have a list of the stocks, bonds and cash in its portfolio. Use this to see how diversified the fund's holdings really are.
- How much turnover does it have? The turnover rate tells you how frequently the fund manager buys and sells. A rate of 25 percent means that one-fourth of the value of the portfolio was sold. The higher the turnover rate, the more in trading commissions the fund is paying, which translates into higher expenses for you. Also, funds with higher turnovers tend to realize more capital gains, which you'll have to pay taxes on (as long as the fund isn't in a retirement account).
- Why is it performing the way it is? Each fund report has some commentary from the fund manager with their interpretation of the fund's performance and outlook for the future. If the fund did poorly, there should be an explanation of how they plan to improve it.
THE BOTTOM LINE: Don't let a bad past experience with mutual funds prevent you from investing in these investment workhorses. With some regular oversight on your part, you can ensure that your fund investments remaining on track.
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