Mutual Funds For Dummies Cheat Sheet

Here are some important principles to keep in mind for success in mutual fund investing:

• Fix your finances first. Before you invest in mutual funds, look at your overall financial situation, set goals, and take advantage of other good investments, such as paying off high-cost consumer debt and using your employer’s tax-deductible retirement savings plan.

• Don’t underestimate the power of saving and regular investing. These habits are far more important, valuable, and achievable than your ability to choose tomorrow’s top mutual fund performers.

• If you need assistance with your finances or investment decisions, hire conflict-free advisors. Competent advisors who sell their time and nothing else are far more likely to have your best interests at heart.

• Always consider the tax impact of your fund-investing decisions. What matters is the return you get to keep (after tax returns), not your return before paying taxes.

• Get your priorities straight. Remember that the size of your fund portfolio has little to do with your overall happiness. Don’t forget to “invest” in your health, family, and friends.

• Use mutual funds. Funds offer a low-cost method of investing in bonds and stocks, and you get a professional, full-time fund manager on your team. Understand the pros and cons of funds and alternatives (for example, exchange-traded funds, hedge funds, picking your own stocks and bonds) before investing.

Here are some tips for selecting mutual funds:

• Don’t expect guarantees. You can be logical, analytical, and sensible and still end up with some mediocre funds. Fund selection isn’t a science.

• Consider the source. You can increase your chances for success by sticking with ethical fund companies that have a history of producing winners with your type of fund.

• Pay attention to fees. Avoid funds that charge sales commissions (loads) and have high ongoing operating expenses. You have more than enough commission-free (no-load), low-expense funds with great managers and track records as alternatives.

• Beware of buying only past performance. Historic performance is but one of many factors to consider when selecting funds.

• *Remember the power of index funds. Index mutual funds, which match and track the performance of a broad bond or stock market index, handily beat the vast majority of actively managed funds.

• Diversify. At a minimum, invest some of your long-term money in stock funds, both U.S. and international, as well as bond funds. If your assets allow, use at least two funds within each category.

• Give up the guru search. No one can predict which mutual funds will rise and fall the most. If someone has figured out a new sure-win system, they’re not going to share it with you and me.

• Don’t overestimate the value of finding tomorrow’s stars. For more than ten years, the best fund managers beat the market averages by a small margin each year.

These guidelines provide sound advice on monitoring your funds and portfolio:

• Keep a long-term perspective. Once a month or even twice a year is the most you need to check in and see how your funds are doing. Following your investments too closely may tempt you to make unwise decisions.

• Buy when the financial markets are on sale. If you’ve chosen wisely, don’t dump your mutual funds when they’re down. Buy more (or at least keep buying!). Be patient — just as when bad weather hits, things get better with time.

• Don’t try to time the markets. Shifting money around — into and out of mutual funds based on the latest news or pundit’s predictions — is almost certain to reduce your investment returns.

• Make fund investment decisions that fit with your goals. If your situation significantly changes or your fund’s performance is much worse than its peers, consider making some changes.

• Compare your funds fairly. Evaluate the performance and cost of your mutual funds against funds and indexes that are truly comparable in terms of types of securities they hold.