Mutual Fund As Your Alternative Investment Portfolio
People always say that investment is a money game with the playing rule of "high risk with high return and low risk with low risk". You may want to invest in an investment portfolio that is able to give a good return and stock market is always the best choice in term of high return. But you aware that investment in the stock market will cause you to lose all your money as well, because the game rule said "high risk is high return and low risk comes with low return". Hence, stock game might not suit your risk profile; you may want to look for an alternative that can give comparatively good reward but with much lower risk than stock. If you are categorized in this group, then mutual fund can be your game.
<b>Mutual Fund Is A Risk Sharing Game</b>
A mutual fund is simply a financial medium that allow a group of investors to pool their money together with a predetermined investment objective. The pooled money will manage by a fund manager. The fund manager is a person who is widely expert in stock and bond markets. He/she is responsible to invest the pooled money into specific securities, usually stocks and bonds. When you are buying shares of mutual fund, you will become one of the fund's shareholders. All the gains and losses will be shared among the fund's shareholders. Hence, mutual fund is a risk sharing game.
Compare to stocks and bonds, mutual funds are one of the cost effective and an easy playing game. You do not need to really expert in stock and bond market because the fund manager will take care of it; and you do not need to crack your head to figure out which stocks or bonds to buy, because you have the expert, the fund manager to make the decision for you.
You do not need a lot of money to get your start the game; you decide the amount of money you plan to invest into the mutual fund. Some mutual funds may even let you start with just $100. The best part is the cost effectiveness. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading cost. The biggest advantage of mutual funds as compare to stocks or bonds is "diversification".
<b>Diversification Will Lower The Risk</b>
Investment experts always advise that if you want to invest you money, "Don't put all your eggs into the same basket; else if the basket fall, all you eggs will break", some will happen on your money, if you invest in one stock, if the stock perform negative, you loss all you money. Diversify your investment to spread out your money into many different types of investments. When one investment is down, another might perform in up trend.
Hence, with the diversification of your investment, you will reduce your risk tremendously.
You can diversify your investment by purchasing different kinds of stocks and bonds instead of one. But it may take weeks to buy all these investments. In contrary, you can get these done by purchasing a few mutual funds and mutual funds automatically diversify your investment across many stocks and bonds.
<b>In Summary</b>
Mutual fund is a risk sharing investment portfolio, it's provides you a medium of investing your money into a high earning stock & bond market while automatically diversify your investment to reduce your risk. Hence mutual fund can be your alternative of investment portfolio that will give you higher reward and lower risk.
Market timing with your mutual funds
When investing in bonds, stocks, or mutual funds, investors have the opportunity to increase their rate of return by timing the market – investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return.
Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize that:
1. Stock markets go up more often than they go down.
2. When stock markets decline they tend to decline very quickly. That is, short-term losses are more severe than short-term gains.
3. The bulk of the gains posted by the stock market are posted in a very short time. In short, if you miss one or two good days in the stock market you will forgo the bulk of the gains.
Not many investors are good timers. “The Portable Pension Fiduciary,” by John H. Ilkiw, noted the results of a comprehensive study of institutional investors, such as mutual fund and pension fund managers. The study concluded that the median money manager added some value by selecting investments that outperform the market. The best money managers added more than 2 percent per year due to stock selection. However the median money manager lost value by timing the market. Thus, investors should realize that marketing timing can add value but that there are better strategies that increase returns over the long term, incur less risk, and have a higher probability of success.
One of the reasons why it is so difficult to time correctly is due to the difficulty of removing emotion from your investment decision. Investors who invest on emotion tend to overreact: they invest when prices are high and sell when prices are low. Professional money managers, who can remove emotion from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between cash, bonds, and stocks following strict protocols and models, rather than emotion-based market timing.
Is It True That Regular Index Investing Performs Good Result With Low Risk?
There are many mutual funds and ETF on the market. But only a few performs results as good as s&p 500 or better. Well known that s&p 500 performs good results in long terms. But how can we convert these good results into money? We can buy index fund shares.
Index Funds seek investment results that correspond with the total return of the some market index (for example s&p 500). Investing into index funds gives chance that the result of this investment will be close to result of the index.
As we see, we receive good result doing nothing. It’s main advantages of investing into index funds.
This investment strategy works better for long term. It means that you have to invest your money into index funds for 5 years or longer. Most of people have no much money for big one time investment. But we can invest small amount of dollars every month.
We have tested performance for 5-years regular investment into three indexes (S&P500, S&P Mid Caps 400, S&P Small Caps 600). The result of testing shows that every month investing small amounts of dollar gives good results. Statistic shows that you will receive profit from 26% to 28.50% of initial investment into S&P 500 with 80% probability.
We must note that investing into indexes isn’t risk-free investment. There are results with loosing in our testing. The poorest result is loosing about 33% of initial investment into S&P 500.
Diversification is the best way to reduce risk. Investing into 2-3 different indexes can reduce risk significantly. Best results are given by investing into indexes with different types of assets (bond index and share index) or different classes of assets (small caps, mid caps, big caps).
You can find full version of this article with full results of our tests here: http://fplab.com/node/116
Is An Index Mutual Fund The Best Choice For Long-Term Investing?
Do you believe that the world economy will grow? Do you believe that US economy will grow? I do. The major stock indexes are indicators of economy grow. You can make money use this opportunity buying index funds. Investing into index mutual funds is easy, interesting, and profitable. It takes 5 minutes every month! If you are long-term investor, index funds is for you!
It doesn’t matter what index you choose. This index will grow due to economy sector grow rate. There are many indexes in the world. But how to get money from indexes grow?
There are many indexes mutual funds. Fund share price change accordance index performance. There are thousands of mutual funds have S&P 500 as a base of their portfolio. The differences from one fund to other are operating company and expenses. Choose fund with fell known operating company and smallest expenses.
Small expenses are very important. If fund have big expenses, the managers steal investors’ money. Index fund manager don’t buy expensive stock market researches, don’t arrive at a difficult decision witch stock to buy. Index fund manager buy stock included into index only. It isn’t expensive!
The best investment strategy for indexes mutual funds is to invest some dollar amount monthly. And be the long-term investor – invest for 10 years or more. Our computer modeling of this strategy shows that you will receive profit, if you invest on monthly base during 10 years. I can’t give you guaranties that you will get profit but the probability of this is close to 100%.
And the last, if you can, diversify you portfolio. Divide you portfolio into three parts. Buy large capitalization company index fund (S&P 500, DJA), small capitalization index fund (S&P 600) and developed market index fund or international index fund. It makes you portfolio more profitable and more stable.
How to select a mutual fund
One of the most common ways of selecting a mutual fund is to invest with the crowd in today’s hot funds. Unfortunately, jumping from one winning fund to another is a recipe for disaster. The mutual funds that the crowd follows typically have had a hot recent performance and tend to gather all the new mutual fund sales.
Investors as a whole are primarily allocating their new investments to a small number of mutual funds and to a smaller number of mutual fund companies. Investors have invested over $400 billion in the 2843 different mutual funds, but one-third of those assets are invested in only 50 of those funds and one-half of those assets are invested in the largest 100 funds.
There are benefits to following the market leaders. Larger mutual fund companies and larger funds have the ability to reduce costs and attract the best professional money managers. However, the biggest limitation is that today’s better-selling mutual fund may not be tomorrow’s winner. This is true for any mutual fund but it seems to plague the best seller, and the one that garners the most attention, the most often.
So buying the equity fund that was yesterday’s best-seller isn’t a strategy that produces excellent returns. You do not have to go fully in the opposite direction and ignore these hot funds, but you should understand their limitations and strengths. They became best-selling funds because they have merit, but you have to access that merit within your own well-diversified portfolio, and not the crowd’s current investment trend.