Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
Mutual funds are great ways to invest. They offer professional management and risk diversification, especially if it's a general fund such as large cap growth and income. The diversification is less if it's specialized such as healthcare, but there is still lower risk because the fund buys many different stocks in a sector. Many investors believe they're at a higher level than fund investing, one where they pick individual stocks and make better returns than mutual funds. That may be true, but most likely not for every investment.
By that I mean there is no way you can invest in China with a diverse group of stocks and know much about each company. And even if you can get information on a company, it's usually at least six months old. Imagine how much changes anywhere in six months, much less in a volatile economy like China. The initial reaction might be that things are even better now. But not necessarily for your company. Or when things do change, as every economic cycle does, you may be the last to know that the bubble burst six months ago for the sector in which your company operates.
Buying a mutual fund (an ETF, Exchange Traded Fund, is included) specializing in a foreign country makes a lot of sense if you're looking to diversify abroad, especially in third world or emerging countries. You need to have your feet on the ground, meeting management, following local developments, to make smart investment decisions in these areas. You can't rely on the Wall Street Journal or your local paper to fill in the gaps as you wait for an annual report on a company 12,000 miles away.
Other sectors such as commodities, biotech, technology, any of the highly specialized groups, pretty much demand constant attention or expertise to make solid investment decisions. If you don't have the time or the knowledge, the specialized funds do. A mutual fund that focuses on financials would be a great way to walk through the land mines that are surely in the banks, savings and loans, and insurance companies currently. Again, funds give you professional management and lots of diversification.
This isn't to suggest you only buy funds. There's a great deal of pleasure in researching and discovering great stocks. The problem is that most investors don't have the resources, time or expertise to truly invest. They have limited information and/or time to dig, discover, then follow stocks. Most have real jobs that keep them busy while Wall Street trades the day away. It's hard to track your investments if you're at your desk doing your job.
Mutual funds can help any investor fill a niche in a portfolio. A well diversified group of stocks is the safest way to invest, one that is guaranteed to lower your stress and raise your returns. To truly diversify, you need representation from many different sectors. Most likely you're not an expert in more than one or two. For many of the others, consider mutual funds to round out your diversification requirements.
Where to find all these different funds? Use the Fund Centers on AOL's Personal Finance. They have fund screening programs that allow you to choose the type of fund, size, load or no load, etc.
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