One twist on this strategy that will test and perhaps improve your mutual-fund investing habits is to start by investing in the type of fund (for example: bond, international stock) that is currently doing the most poorly - that is, you can buy when things are “on sale.”
Then, the next year, you can add the fund type that is doing the most poorly at that time. Make sure to buy the better funds within the type that is doing poorly.
Also, some funds have far lower minimum initial-investment requirements if you sign up for an automatic-investment plan. Every month, a regular amount is automatically deducted from your bank account or paycheck and invested in your fund choice. This is a great way to invest no matter what your financial means.
For example, T. Rowe Price Spectrum Growth, a well-diversified fund of funds, requires a mere $50 initial minimum if you sign up for the automatic-investment plan. Vanguard’s Star fund, which is a fund of funds, has a minimum initial-investment requirement of just $1,000.
Q: Regarding criticisms of investing in mutual funds, much of it focuses on the fact that a large percentage of funds don’t beat the market averages. Would I do better, as suggested by a book I read recently, investing in stocks of my own choosing rather than investing in stocks through funds?
A: View the returns that these authors are claiming with a healthy dose of skepticism. Book authors, unlike mutual funds, are not subject to SEC regulations, and they don’t have their returns independently audited.
For example, as I wrote about in the past, the Beardstown investment club in Illinois claimed an annual market-beating return of 23.4 percent on its book cover, and sold scads of books before a reporter figured out that this return was a fraud. They actually have underperformed the market averages (earning just 9 percent per year versus the market average of about 15 percent)!
While it’s true that the majority of stock mutual funds underperform the stock market averages, that does not argue for investing in individual stocks! I can guarantee you that an even larger portion of stock-picking individual investors underperform the market averages.
Index funds, which mirror the broad stock market averages, are a good way to invest. You also can increase your odds of beating the market averages by shunning funds with high fees and undemonstrated track records.
Eric Tyson is author of Let’s Get Real About Money! and Investing for Dummies. Write him at eric@erictyson.com.
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