If you are going to learn from this site, it should be these 5 things:
Never pay a load. Practically all funds that charge a load are not worth it. You are just paying an extra fee, which is likely going into the pockets of whoever is trying to convince you to buy the mutual fund.
Keep the expense fee small. Make the mutual fund justify the expense fee. Don.t just blindly pay fees. Anything you pay detracts from the returns you can make. It might not seem like a big deal to pay a 1.5% fee instead of a .8% fee, but it can add up to a lot over the long run.
Don’t buy too many mutual funds. A mutual fund in of itself is diversified. Most mutual funds invest in over a hundred different stocks. You don’t need to invest in multiple mutual funds that target the same asset type (such as large cap growth stocks).
Be wary of very large mutual funds. When a mutual fund gets to be a large size, it becomes more and more difficult to invest its investors’ money. Try to invest in mutual funds with a $5 billion or less in total assets, even smaller if it’s a small cap targeted fund.
Consider buying an index fund. Most mutual funds don’t beat the market. An easy way to get returns is to just mimic the market by buying an index fund.
Why should you invest in mutual funds? It’s a question you probably didn’t ask yourself even before you visited this site! You just assumed mutual funds were a good investment for yourself. Is that the case? Maybe, but not necessarily. Here’s a few reasons why you should and should not invest in mutual funds.
Mutual funds allow you to invest your money in the stock market without doing any work yourself. Most people do not have time to track the market and decide which stocks are good buys and good sells. When you invest in a mutual fund, you give your money to a professional to invest it for you. Hopefully, he will invest it well.
Mutual funds are instant diversification. Most mutual funds invest in several hundred stocks. Taking the time to have your portfolio properly diversified yourself takes considerable time and effort. Just investing in one mutual fund will generally provide yourself with a significant amount of diversification.
Mutual funds allow you to invest in exotic areas. It’s difficult for an American investor to invest overseas, particularly in areas such as foreign small caps and emerging markets. Mutual funds provide access to these markets.
Here are a few reasons why you shouldn’t invest in mutual funds:
Most mutual funds don’t beat the market. Instead of investing in a mutual fund, just randomly picking stocks can yield better returns in the long run. An effective way to beat most mutual funds is to just invest in a broad market ETF, such as an S&P 500 tracker (like IVV or SPY).
Mutual funds charge significant fees, often exorbitant fees. Beware of paying too many fees when investing in a mutual fund. Obviously, a mutual fund must charge for the privilege of investing your money for you. But, some mutual funds simply charge too much.
Here you will find my personal experience with several mutual fund families. To be clear, this is just my personal experience and in no way should be the basis for your decision whether to invest with these funds or not.
Fidelity: Always having been one of the largest fund families, Fidelity offers many mutual funds. I’ve personally invested in quite a few of these, and they tend to have solid returns compared to their peers. What I like about Fidelity is that they have many funds with no loads and tolerable expense ratios. They also have an excellent S&P 500 index fund, FSMKX. Their Contra Fund, FCNTX, is insanely large, though still manages to perform well.
Bridgeway: A small fund family that I think deserves a second look from most investors is Berkshire. They are highly rated by the Motley Fool, and they offer quite a few solid funds with low expense ratio. They also have aggressive mutual funds, which make potentially good investments for people willing to leave their money in the market for a long time.
Franklin Templeton: One mutual fund family I can’t recommend is Franklin Templeton. Loads and high expense ratios are the name of the game based on my experience. When I was younger and had less stock market experience, my banker talked me into investing into one of their funds (it had a load). My guess is his recommendation was based on whatever kickback he or the bank got.
Vanguard: Unlike most fund families, this group solely runs index funds. Their low expense fees and solid performance makes Vanguard a great choice. You can read more about index funds in our index funds article.