IF MUTUAL FUNDS are supposed to make investing easier, then why is choosing one so often such an angst-ridden experience?
Maybe it's because there are more than 8,250 funds available — 8,000 of which you've never heard of before. Maybe it's because an alarmingly large number of them lag the market over the long run. You've always heard that a good fund can help you pay for that dream house or grease the skids in retirement. But what makes a good fund and where do you find one? That's what you need to know now.
Between this section and the Mutual Funds department in Investing 101, we can educate you in the finer points of fund selection. We've even got what we think are the best search and information tools on the Web to aid you in your quest. But before we get started, we've got to come clean about something: You can save yourself a whole lot of trouble and just about guarantee success by simply choosing an index fund and holding on to it for the long haul.
Index funds are cheap. They're tax-efficient. And they routinely beat the majority of actively managed funds. Over the past 10 years, only 30% of domestic equity funds beat the S&P 500. And over the past 20 years, only slightly more than 12% did, according to investment-research firm Lipper. What are the chances that you would have picked one of the few winners? Remote.
So if indexing is a sure thing, why bother looking for an actively managed fund? There are at least four reasons we can think of...
Because you believe your manager can beat the market indexes.
Because you want a manager who practices a particular style not offered by index funds.
Because you want to invest in a specific market sector, like health care or financial services.
Because you simply feel more comfortable knowing that a human being is picking the securities in your fund.
If you would like an actively managed fund but don't want to spend the time doing the research, check out our Bedrock Mutual Funds page. There you'll find our favorite funds ranked by risk level in categories like large-cap, small-cap and international. First, though, make sure you've got your assets allocated properly by visiting the Asset Allocation section in our Taking Action department.
If you do decide to search for your own funds, this section can help. Here, we offer Seven Steps to Picking a Good Fund, a primer on how to make an intelligent decision. We also have three Fund Screens, which will show you how to use our interactive Mutual Fund Finder and Fund Analyzer to identify funds that meet specific investment goals.
Next...The Seven Steps.
