Establishing a regular savings program is essential for securing a future retirement, but ensuring that money continues to grow is the real secret to accumulating wealth. Take a look at three common methods for managing a mutual fund.
Dollar Cost Averaging:
This is a good plan for those who are able to invest a set dollar amount on a regular, preferably monthly basis. If you invest in a mutual fund in this manner, clearly in certain months you are acquiring more shares of the fund than in other months. This may seem counter-intuitive to some as you are buying more when the price is down. However, this approach removes any emotion from the equation and relies on the belief that over a period of time, despite cyclical trends, the market will rise. Over time, the costs average out, but you have acquired more shares in the down market.
An index fund is a type of mutual fund that is designed to track the performance of a specific index of the market. Obvious ones include index funds based on the S & P 500 or the Dow Jones Industrial Average but can include any groups of stocks with similar characteristics. Index funds typically have lower costs associated with them than other mutual funds because no ongoing research, analysis or projections are necessary and there is a strong tendency to maintain the same securities in the fund for a longer period of time, which reduces transaction fees.
Go with your Gut:
While this is most often the least successful investment strategy for mutual funds, it is probably the most common one for the individual investor. You may look at your portfolio and see what you don’t have and look to add something different. You may ask what friends have done with their money and try to replicate what has worked. Unfortunately, you will likely be chasing the past cycle and end up on the wrong side of the market. Even if you have some success with certain investments, this strategy almost always creates the least positive returns.
Any investing requires a fundamental assessment of your goals as an investor. Diversification is always a good rule of thumb, but you also need to pay specific attention to your age, when you will most likely need your money and, importantly, your personal risk tolerance.
Edward Schinik has been with the Investment Manager since 2009.