Choices, Choices (Part 2)

So how do you pick a mutual fund?

The mutual fund industry has made a business out of selling this diversification and manager expertise. There are now almost 90 million investors in funds worth over $10 trillion in the market. What are some of the most common pitfalls of using mutual funds?

We saw last week why picking a hot fund is self-defeating: hot funds attract hot money that overheats their sectors and leads to a boom/bust cycle. But investing in an un-hot sector has its problems as well. Often those turn out to be specialized niches of the investment landscape—such as emerging market funds, junk bond funds, or mico-cap stocks. Prudent investors are wise to limit how much they put into any one of these areas.

Eventually, however, by putting a little money into lots of different funds, you end up owning the whole market. That’s okay, but active managers are going to charge active management fees, so after fees you’re probably not going to do as well as the market. You’d be better off in a total market index fund.

So hot funds and the grab bag approach are out. But what does work? An old Russian proverb: trust, but verify.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By |2014-09-05T20:25:32+00:00September 20th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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