fredrik wrote:
Im all new to funds ive done some investing in stock (british stock btw) and i want to start investing in us funds to divesify my portfolio ive looked at morningstar and such but im very confused on the numbers and how the fund increases and such and im totally losts i already know all about the basics of it from Learn to Earn by Peter Lynch but i need some more help and helpful tips or some sites to point me in the right direction would be great thx alot
Some of the biggest things to look for when choosing a fund are:
1 - load. This is how much you have to pay to buy the fund. They range from 2%-6% and, IMO, for the most part they are not worth it. It just guarantees that you're going to start that much in the hole.
2 - ER/TER. These are the annual expenses for a fund. Expenses range from low (.10% for an index fund) to high (2% for a managed fund) depending on the type of fund you are buying. You want to stay as low as you can because the higher the expenses the less that goes into your pocket.
3 - 12b1 fees. These are administrative costs associated with a fund. Pretty much a scam and usually go along with loaded funds so see above.
When you've figured out what kind of fund you want to invest in (I'm partial to index funds) then you start looking at the details.
~Look at how it's performed. Though past performance does not indicate future performance, if the fund you're looking for has consistently, over 10+ years over or under performed it's benchmark then it's something to consider though it shouldn't be the main consideration. Whatever you do, don't chase performance. People who are chasing performance are currently buying REITs and energy funds which have had a huge run-up in the last few years. Well whatever goes up usually comes down and when you buy at the top you have much further to fall. So, while performance should be considered it shouldn't be the main motivation.
~Look at the fund manager. Does he actually do what he says he's going to do with regards to the fund? If it's an emerging markets fund yet some of it's biggest holdings are BT, GOOG, XOM or other big names then it's not really an emerging markets fund so I'd steer away from it. Look at if there has been a change in management. If you find a fund that has consistently beaten the benchmark for the last 20 years but it just got a new manager in 2006 I'd be a bit leery since you don't really how how that person will perform.
~Morningstar rating. This is basically a glimpse at how the fund is ranked on several different levels. The higher the rating the better usually. Try to stick with 4 and 5 star funds.
~Diversification. Remember that you only need 5 funds to be completely 100% diversified. You can add a couple more if there are specific sectors you want to increase exposure to but just adding more funds doesn't get you more diversified. It just means you're probably holding a lot of the same stocks and paying twice for the priviledge. So, when you're going to buy a fund, check the holdings with things you already own to make sure there is not a lot of over-lap. One good example of this is the S&P 500 fund vs. a total stock market index fund. They seem different but when you look at holdings, pretty much every stock in the S&P is in the TSM fund. If you owned both you'd just be doubling your exposure to US Large cap stocks. In that case it would probably be better to go with the TSM fund if you don't want to hold a lot of funds or the S&P if you also plan on buying a small and mid-cap fund to balance it out.
~Asset allocation. This is really the key to investing success so it's important to focus on this and set up a plan. If you're not sure what your asset allocation should be, I suggest taking a few tests online to see what they come up with. Then, take those results and look at your comfort level as an investor and figure out your asset allocation mix so you're invested in a way that gets you diversified and is ok for your risk tolerance. If you don't want to worry about asset allocation, the target retirement funds are ideal. They are a single fund which is completely diversified and allocated based on your retirement date. they automatically become more conservative as you get older so you can really just put your money in and forget about it.
well, hopefully this gets you started. I'm still half asleep so if anything doesn't make sense, sorry and please ask for clarification. Or someone else can chime in with more info.
One book I suggest newbies read is Investing for Dummies. It's a great learning tool to find out all about different types of investments and accounts and how to choose between different options. You may want to check it out.
good luck!
