When I explain to people the consistent returns of my mutual funds in my retirement account, they all want me to assist them with their retirement portfolio. However, the trouble I find is many people want you to do the study for them rather than taking the time out to understand what investing in a mutual fund really means. Many investors are just throwing darts when it comes to selecting mutual funds within their retirement program. Then they wonder why their mutual funds did not perform like the stock market. First, let me say, about eighty percent of fund managers do not out perform their benchmarks. Due to this, I have been performing short term trading in my retirement account since 1996 with averaging 25% annual returns over that time. I normally do not stay in the market long term as many investors are told to do with mutual fund investing. The main reason is, with some education I have learned technical analysis which can be applied to mutual funds, and I just wait for the right set ups. I can maneuver in and out of the market and accumulate consistent annual percentages that the long term investor dreams of having. However, seeing most people are long term investors, I will provide long term guidance on things not to do.
1. Do notgo into a mutual fund without understanding what the Beta is of that fund. Beta is a measurement of a risk factor for a fund. First, ask yourself on a scale of one to five with five being high risk; how much you are willing to risk of your money. Now, you may say, none, however in the market there is risk and a stock or mutual fund will be labeled with a Beta number by its volatility which can increase or decrease your risk. If you click here at Investopedia.com it will give you guidance on what Beta means. Then go to your mutual fund’s prospectus or your representative to find out what the Beta is for that fund. Then match it up with your personal feelings of risk.
2. Do not pick a fund without understanding the fund’s objective. What are they investing in? There are many categories; growth companies, natural resource funds, small caps, international companies, etc. The type of reading you should do is more on where the economy is going. Sometimes something so simple as observing a lot of for sale signs in real estate in your area or a lot of discounts from retailers can give you a signal of what is really happening in the economy. There is a lot of good information on the Internet about the growth of the economy and what areas seem to show a trend. You need to read and stay on top of it. Then you can determine if investing in a particular mutual fund makes sense. For example; if oil or other hard commodities seem to be topping out soon, why would you invest in a natural resource fund that holds a lot of oil companies in their portfolio? When you hear of changes happening that should give you a heads up to change your mutual fund allocation.
3. Do not pick a fund based on prior year returns. If a fund has been going up from last year it does not always mean it continues the same course. Fund managers as well as the economy do change and so will the performance for that fund.
4. Do not invest in the same type funds and assume you are diversifying. You need to make sure you understand what diversification really means. There is no need to select several funds of the same type, i.e. three growth funds, two small cap funds, three income funds. Typically, the same funds have similar picks so the outcome is really the same; perhaps with a percentage or more difference depending on the fund manager’s performance. It’s not enough to make a big difference. If anything you can select the best performer out of the growth funds in your group by reason of a manager’s performance. Diversifying within mutual funds means 20% in one growth fund, 20% in one small cap fund, 20% in one international fund, etc. That’s a blend of all types of funds and that will help balance your risk. If you want to be more aggressive, go back and check out the beta for the funds as mentioned in tip number one.
5. Do not cost average in the fund. You might read or hear that is how you make up for the ups and downs in the stock market by allowing your deposits to just go into the mutual fund on a consistent basis. However, how do you know you are picking the right fund for long term? As mentioned above, the economy will change or your fund manager can change and so will your returns. Now there is something you can do to give you better returns and that is to have your deposits go into a money market. Then if you like the fund you have selected; wait for big pullbacks or a correction and put the whole amount in at once or spread it out if you are unsure of the trend of the market. By then you might also be able to see if you have chosen the right fund based on its performance in comparison to the overall market. If you didn’t, it provides you an opportunity to put new money in somewhere else and then move the losing fund to your new fund. You can check your retirement account’s site to see what the monthly or quarterly performance is for their mutual funds by looking at the ytd (year to date) return.
6. Do not listen to other people’s recommendations. Most times they do not know any more than you do.Look at your funds profile that will list the top holdings and what industries they are investing in. This goes back to tip number two where you need to understand the fund’s objective.
7. Do not wait till you get your quarterly report to know if your fund is performing well. Are you aware that many funds have symbols like stocks, and you can look them up on the Internet or ask your representative? You can place them on a chart to see how it has been performing daily rather than waiting quarterly. Just go to Yahoo’s website under finance and put your mutual fund symbol into the quote query. There are charts attached to that. You can add other funds onto that chart to compare fund performances to each other. This is part of technical analysis when looking at a fund on a chart. Here is an example. Click on “this”. This is Fidelity International Fund. Now, compare it to another fund by adding any mutual fund symbol “here“. Not all mutual funds have symbols, however many do.
If you do plan to switch your funds more often within a calendar year make sure you know your retirement fund’s rules on trading in and out of the fund even if you are a long term investor. Some plans have strong restrictions while others are not that bad. Without knowing the rules, you can be restricted in transferring funds on the Internet or by phone or be charged a redemption fee if you violate them.
You should never be complacent when investing in mutual funds especially in your retirement account. Otherwise, you might end up like many did back in 2001 and 2002 when many investors lost 20-30% of their money when the bear market came. Some of these people still have not recovered their losses.