The truth about investing in the stock market is that most of us do not have the time or expertise to do detailed analysis on a multitude of companies so that we can make an informed investment decision. Also, we are not in a position like Warren Buffet to have an army of analysts look deeply into companies’ financials and make successful decisions.
So we have to pay someone else to do the hard work and let them pick a portfolio of companies that should perform well and produce good returns. The easiest way for the average person to do this is through mutual funds. Funds are probably the best way for the small investor to have a diversified portfolio that is managed to specific goals set out in the fund’s prospectus.
It is impossible to spell out all the pluses and minuses of mutual funds in a few paragraphs. There are a few things that people should think about when someone recommends a fund.
Mutual funds may all sound the same, but they are not. They invest in different markets, types of industries, have different strategies, invest in different instruments and have different track records. Your financial advisor needs to explain to you why a particular fund is right for you.
Morningstar is an organization that rates funds, as well as stock and bonds. Most funds that you will want to consider investing in will be four or five star.
The fund prospectus will tell you a lot about the fund’s history, major holdings and although they are boring to read, it should be done.
A fund is no better than the investment manager or management team. Your investment professional should be able to tell you about the management and alert you any changes.
For some people there are small tax disadvantages to funds. They are often better for tax deferred accounts (IRA’s, etc).
Your broker should be able to tell you exactly which companies the fund is buying. This is useful if you own more than one fund, as from time to time you discover that funds are all buying the same thing and you really are not diversified to the degree you thought.
As always, do your homework about the funds that might suit you and meet your goals.
For further information please contact, Wolcott Financial Solutions.