How to select a fund?
Before looking at the mutual funds available to you, it may be best to decide the mix of stock, bond, and money market funds you prefer. Some experts believe this is the most important decision in investing. Here are some general points to keep in mind when deciding what your investment strategy should be.
Diversify. It is a good idea to spread your investment among mutual funds that invest in different types of securities. Stocks, bonds, and money market securities work differently. Each offers different advantages and disadvantages. You may also want to diversify within the same class of securities. Diversifying can keep you from putting all your eggs in one basket and therefore, may increase your returns over a long period of time.
Consider the effects of inflation. Since the money you set aside today may be intended to be used several years down the road, you need to look at inflation. Inflation measures the increase of general prices over time.
Conservative investments like money market funds often may be popular because they are managed to keep a steady value. But their return after accounting for the inflation rate can be very low, perhaps even negative.
For example, a 4% inflation rate over a period of many years could erase a money market fund’s 3% yield over the same period of time. So even though such an investment may give some safety of principal, it may not be able to grow enough in value over the years or even keep up with the rate of inflation.
Patience is a virtue. It’s no secret—the prices of common stocks can change quite a bit from day to day. Therefore, the part of your account invested in stock funds would likely fluctuate in value much the same way.
If you don’t need your money right away (for at least 5 years), you probably don’t need to panic if the stock market declines or you find that your quarterly statement shows the value of your investment has fallen. In the past, the stock market has regained lost value over time. Although you are not assured it will do so in the future, try to be patient and allow your stock funds time to recover.
Remember the saying, “buy low, sell high.” Switching out of a stock mutual fund when prices are low is usually not the way to make the most of your investment. Of course, if a fund continues to under-perform over time as well as your other fund choices, you may want to consider changing funds.
Risk. When you are choosing funds, be sure to consider how much risk you are comfortable with and how close you are to retirement. If retirement is around the corner, you may want a portfolio with very little risk. On the other hand, if you are younger, and have the time to weather the market’s ups and downs, you may want to choose a more aggressive investment strategy.
source: Franklin Templeton Investments. .