Make the Most of Your Mutual Fund Money
For most investors, the past 10 years were sobering. In the early part of this new century, rampant speculation drove hot growth stocks sky-high, which culminated in the tech-bubble burst. During the market's plunge in the latter years of the decade, some of the most trusted names in the financial sector came to the brink of collapse. Times have changed. The full-steam-ahead market we've grown accustomed to is likely to slow. In turn, so should your investing habits. Here are some tips on how to become a smarter, more frugal mutual fund investor.
Investing on the Cheap
When times are tough, it can be daunting to come up with enough cash to start -- or continue -- investing. But even a relatively small amount of seed money can pay off big in the long run: With an initial investment of
Exchange-traded funds, which look like mutual funds but behave like stocks, offer a simple, low-cost way to invest and gain instant diversification. Investors can buy as little as one share of an ETF, whereas mutual funds often require upfront investments of
There is one major drawback: ETFs are traded through brokerages, which typically charge a commission every time an investor buys or sells shares. A
Call it the lazy man's portfolio, but premixed funds offer instant diversification with no hassle. The
Actively managed funds.
If you prefer the expertise of a professional stock picker -- and are prepared to pay a bit more in annual fees -- you can invest in an actively managed fund for as little as
Funds That Pay in Tough Markets
Funds that invest in dividend-paying stocks may not wow investors with eye-popping returns during bull market rallies, but their added yield can provide some cushion in devastating bear markets. Some blue-chip stocks consistently pay out dividends year after year, and although the companies can cease those payouts at any time (as many financial firms have), mutual funds that invest in dividend-paying companies can pick and choose to provide a steady stream of income. From 1926 to
Capital appreciation, or growth, is what investors generally think of when it comes to returns, but stable income on the side can be helpful in periods when markets are falling or at a standstill. "There's the capital appreciation, which usually is the bigger component of your total return . . . but the income portion can really hold you in good stead when the market just isn't moving anywhere," says
Equity income funds invest in dividend-paying stocks or a mixture of dividend-paying stocks and bonds. The average yield of equity income funds was 3.45 percent at the end of December, compared with an average yield of 1.90 percent for stocks in the
Rosenbluth holds two Vanguard equity income funds in high regard: Vanguard Dividend Appreciation Index (symbol VDAIX), which contains companies that have consistently boosted their payments over time, and Vanguard Dividend Growth (VDIGX), an actively managed fund that focuses on strong, steadily growing companies. Both funds invest in a range of companies rated highly by
Don't Get Burned by Fund Fees
Now, more than ever, mutual fund investors should be aware of how much they're paying their fund companies in annual fees, which include administrative, marketing, and management expenses.
Say two investors put
Assemble a strong team of low-cost funds.
Look for the lowest-cost core funds available, Rahbar says. ("Core" funds are those that typically make up a large portion of investors' portfolios, such as U.S. large-cap funds.) Research shows that over time, the best-performing funds are often the cheapest. Fees compound over time -- the same way returns do -- and lower fees mean managers have a lower hurdle to clear to beat their benchmark. Cost aside, look for managers who have a solid long-term record in both bull and bear markets and invest with a long-term horizon. Rahbar recommends that investors limit more aggressive funds with loftier fees to a smaller portion of their portfolio.
Compare fees among funds.
Large-cap funds are generally the cheapest to own. The median annual fee for no-load, large-cap funds is 0.95 percent, while the median for small-cap funds is 1.20 percent and for international stock funds, 1.23 percent, according to
Watch out for loads.
Sales charges -- also called loads -- can be a frugal investor's enemy. There are two types of sales loads: Front-end loads are upfront charges, and back-end loads are applied when an investor sells a fund. Loads are usually waived when investors buy funds through a financial adviser, and they're also waived in 401(k) plans. Otherwise,
Investing - Make the Most of Your Mutual Fund Money
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