In an ideal world, we would all have the time and expertise to pick our own investments. Unfortunately, most of us don’t have an MBA from Harvard and our other responsibilities keep us from having the time to worry about our investments.
For many individuals, getting a financial advisor can make a lot of sense. One way to indirectly hire a financial advisor is through the purchase of mutual fund shares. The fund advisor will make a lot of your investing decisions for you.
When should you invest in a fund?
These times are opportune:
1. After you’ve determined that the fund manager’s track record is based on skill, rather than luck. Investors are notorious for looking at a fund’s short-term results. Don’t fall into the trap of believing a fund’s manager has the Midas touch based on a couple of quarters of good performance. A market cycle of 3-5 years is a good start.
* Spectacular short-term results are rarely repeated.
2. After you’ve completed your due diligence. While you won’t have to spend time analyzing individual securities, it’s wise to spend some time researching a profitable mutual fund to purchase.
* Consider the track record of the fund manager. Also consider the fund’s reputation and any turnover in the management team.
* Keep in mind that certain types of funds tend to do well in certain types of markets. Remember to consider the fees associated with the fund.
* The most important thing, and the most difficult, is to attempt to project the fund’s likely success in the future. Unfortunately, most fund ratings and metrics can only look at the past.
3. If the fund is an index fund. Index funds are difficult to beat. While it might seem that active managers should be able to beat the market, more often than not, they do not.
* Most fund managers cannot provide a large enough return to overcome the fees they charge and still beat an index fund. Index funds are great for defensive investors.
* Many investors scoff at the idea of investing in an index fund. But try not to jump to conclusions. Look at the returns over the long haul. You might be very surprised.
4. When you have no other options. Many 401(k) and 403(b) plans don’t offer any options besides mutual funds. The question isn’t whether or not to purchase a fund. It’s a question of figuring out the best fund from the available offerings.
* Realize that your retirement plan sponsors cannot provide advice. You’ll have to pick a fund on your own.
5. When there’s no other reasonable way to invest. If you’re interested in foreign or emerging markets, it might not be reasonable to attempt to invest in these markets on your own.
* For example, many European markets are neither very liquid nor friendly to individual investors. In this type of situation, a mutual fund is a smarter move.
* Mutual funds provide a great way to have diversification in many different asset classes. It’s not easy to become an expert on precious metals, foreign currency, and auto manufacturing. Sometimes it’s more effective to just hire experts.
When buying a mutual fund, it’s your responsibility to do the necessary research and homework. While the amount research required is likely to be less than the research required for individual stocks, there are some differences in the type of information you need to examine.
One of the greatest benefits of investing in a mutual fund is that your account is managed by a registered investment advisor. Be wise when choosing how to invest your money. There are many times when a mutual fund can be the best choice.