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Main Page Site Index Getting Pregnant Pregnancy Parenting Pregnancy and Parenting Journals Fertility Nutrition Pregnant Moms Morning Sickness Women's Health Child Health	A Beginning Investor - Part 2 by Gary Foreman Last week, in part 1 of "A Beginning Investor" we considered different ways for Karen to start a regular investment program with only a few dollars a month. The simplest, safest, most cost effective solution was to use mutual funds. But how can you find a good fund? That's the challenge we'll face this week. The first question that Karen, or any other first time investor, needs to ask is why they're investing the money. If the money is being saved for a long range goal (like retirement ten or more years in the future) then a common stock fund would be the most likely choice. On the other hand, if Karen expects to need the money in three years to buy a house, she'd be better off in a balanced fund that includes both stocks and bonds. The reason is simple. A common stock fund can be expected to grow faster over a longer period of time. But that increased growth comes at a cost. Some years a stock fund won't do so well. Might even lose money. That's tough if you've only been in the fund for a year and want the money for a down payment on your dream home. But, if you'll be in the fund for a longer period of time, you've probably had enough good years to more than compensate even if you need to sell right after a bad year. A balanced fund, on the other hand, is safer. It contains both stocks and bonds. And the events that cause stocks to go down, often cause bond values to go up. So your total investment is more stable. That's exactly what happened during the last stock market crash in the 80's. You won't make as much money, but you're less likely to lose part of your investment. The next step is to decide which fund to choose. That's not as hard as you might think. You really don't need to be able to read a financial statement or do any fancy math to make a good selection. All you're going to do is to find out some basic information about the funds. Surprisingly, the fund will almost pick itself. Begin by contacting a couple of large no-load mutual fund companies. If you don't find their phone numbers in the financial section of your local paper, visit the local library and look for an index in "Money Magazine" or other similar publication. Your first call to the companies will be to ask them which stock or balanced fund within their family they recommend. Be prepared to take some notes because you're going to ask some questions about the funds they suggest. You might even want to make a sheet of paper with a column for each question and a row for each mutual fund. That'll make it easy to compare the answers. First, ask about any sales charges, the minimum initial investment and minimum for additions. Follow that up by asking how long the fund has been in existence. You should probably eliminate any fund that isn't at least five years old. If it's newer than that, you won't be able to learn enough about it's performance to evaluate it. Next, you'll ask about the fund's growth over the last five and ten years. Ask the company to give you the growth rate assuming that you're reinvesting all capital gains and dividends. That will give you an idea of what the fund has been doing. It's one of the major yard sticks you'll use to compare funds. By now you'll be eliminating some of the choices. That's our goal. To reduce the choices to only those that are likely to do well for us. The next question will drop a few more off the list. Ask how long the fund manager has been running the fund. You'll find some cases where the fund has done well for the last ten years, but John Doe just started managing it last year. That means that you can pretty much throw away the performance numbers on that fund. Take it off your list. You'll notice that we haven't asked about administrative expenses in the fund. It's not that they're not important. But, the performance numbers we're getting include the cost of expenses. So, in effect, we've already got that info. The final question is one that most investors don't think to ask. And it's a shame. You need to find out what was the worst year for the fund in the last fifteen. How did the fund do when times were tough? Get both the rate of gain (or loss) for the year and which year it occurred in. One year that can often tell the good from the bad is 1987. You might want to ask how the fund did in that market. The 90's have been good for US stocks. You want an investment that won't crash in bad times. Now you're ready to compare funds. You should have already eliminated the funds that had minimum investments too big for your situation and funds where the manager is new. You can also forget about all but the ones that have performed best over the five and ten year periods. You'll probably find one that's good over ten years, but had a really bad 'worst year'. Feel free to cross them off the list. What should be left is a few funds that have performed well and will accept the size investment you can afford to make. You should be safe in selecting any fund that can meet these criteria. You can make your final choice based on the five and ten year performance numbers. There you have it. A simple way to pick a good fund without being a Wall Street wizard. That's not to say that your chosen fund will never lose money. It can. But, based on past performance you have some reasonable idea of what to expect. Thanks again to Karen for giving us the opportunity to explore how to begin an investment program. Hope that her choice helps her achieve a more secure financial future. Gary is the editor of the Dollar Stretcher website. You'll find hundreds of free articles to help you save time and money. There's even a free weekly email newsletter. Visit today!