Are Mutual Funds Still a Good Investment for Today?

Today's Mutual Funds

For several years, mutual funds have been the chosen investment of the average investor. Those who do not have the time to truly study the stock market (or other markets) have felt much safer having professionals handle their money and with the diversification that is inherent in mutual funds.

Of course, when we talk of mutual funds, we are still talking about a very wide array of investments. There are nearly countless mutual funds, each with different emphases and managers. So, speaking in generalities is necessary in this article, but it also hurts the overall message, since some funds will do well in terrible times while others will struggle in good times.

Over time, well-managed stock funds have done at least as well as the overall stock market. Most well-known financial advisers state that mutual funds are not only a major part of one’s investment plan, but a wise part of that plan, too. However, with concerns over our nation’s overall economy continuing to mount, many investors are concerned. Some are pulling money out of funds, while others are simply not adding any more money.

What should you do?

I can’t answer that question, but I can say that my family is continuing to add to our mutual funds monthly. The reason is that we will not need the money – hopefully – for many years, so we are not concerned about the short term losses that might come. We also believe that, over time, the best of the best in American companies will still be finding ways to grow their business and be profitable.

The question posed in the title of this article makes one assumption that is very important to this topic. The last word of the question, “Today,” is where many people get in trouble with most types of investing. If you are needing the money from mutual funds today (meaning, in the very near future), then they are rarely if ever a good investment – no matter what the economy might be doing. In fact, at that point, they are not really an investment at all because to invest assumes that you are looking further into the future.

Long-Term Mutual Fund Investing Tips

So, knowing that we are looking further than a few months down the road, here are some investing tips if you still wish to purchase mutual funds.

1. Buy funds with historical track records.

Funds that have weathered downturns in our economy before can be found. These are the funds you need to look for. They will still, most likely, lose money during a bad stretch, but they know how to overcome those losses and continue to press forward.

2. Stay consistent and don’t time the market.

Do not try to time the market, even in an investment as diversified as mutual funds. Instead, set aside the same amount every month and keep adding over time.

3. Diversify across fund types.

While you are diversified within the fund, also look at trying several different funds. Dave Ramsey suggests 25% of your portfolio in each of four types of funds: growth, growth and income, aggressive growth, and international. Even if this is not your choice of how to set aside your money, it is a good place to start.

4. Stop watching the daily stock report!

This may be the most important step. The stock market will have down days, weeks, and even months. If you can’t stomach those daily dips, you don’t need to be in the stock market at all. You are looking at historical trends, and not daily movements in the market.

5. Get good advice.

If you have a financial planner, that is good, but you may want to have more than one person helping you if you gain some level of wealth. These advisers can also help you keep your eye on the long-term goal and not on some short-term losses.

6. Think about getting more conservative with age.

Some financial planners suggest this, while others do not. If you struggle with the ups and downs of the market, however, you may consider moving out of more volatile types of investments as you age.

Facing a “fiscal cliff” or any other economic downturn can cause anyone to be a little timid with investments, but wisdom and a long-range view will help you stay the course.

What other suggestions would you have? Do you think mutual funds are a good investment?

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  1. Robert Jacobs

    Mutual funds are an excellent investment, especially for those with limited investment knowledge. Novice investors with a long term horizon can easily pick from index funds meeting Dave Ramsey’s recommended allocation strategies.

  2. joe

    Let’s look at things historically. Let’s go all the way back to 2008. It was the professionals on all levels that got us into this mess. The more product they sell, the more they make. Why would professional investors ever say to not invest?

    Answer this question. How does a professional investor make money when there is no up front fee? Let’s take the example of an annuity. The commission is 7%. That is why when you invest in an annuity, it must stay with the company a certain number of years or there will be a penalty. That covers the commission. That also means that you invested 7% less. Nobody ever tells you that.

    More than 1/2 of all stock trades are done in micro seconds made by computers looking for a change of price of a few pennies. How can any individual compete with that?

    Even before the Great Depression markets were manipulated. The big boys would pool their money and buy one stock. When individuals recognized the climb in price, they invested. Meanwhile, the big boys slowly sold.

    The Madolfs with their Ponzi schemes are still around. I’ve been approached at public gatherings several times since 2008 with annuities promising 5 to 18%. One was a Reverend that lost his license to sell products and lived in his van. To close a deal, he would bring over his licensed buddy.

    I say, invest in yourself. Start a side business.

    By the way, I did not take a beating in the market. I cashed out about 3 months before the crash and placed it all in IRA’s in the form of CDs at the bank. Doing a little backward math, it would seem to me that my gain was not much better had I invested in CDs and there would have been no risk.

    Can money be made in these markets? Yes. Money may also be made in Vegas.

  3. Leo Cesna

    While well intentioned, most of the information provided in this article is false. The vast majority of actively managed mutual funds, 70% to be exact, fail to beat the S&P 500. If you find a winner don’t expect it to continue the winning streak. You and countless others will be jumping in for a piece of the action. The larger a fund gets the tougher it is to beat the averages. An actively managed fund has to do several percentage points better than the index to cover management expenses.

    An S&P 500 Index fund should be the core equity fund for most individual investors but only when the market is safe to do so.

    The U.S. Stock market has been in a Secular Bear Market since 2000 and it’s certainly not over yet. It may end in 6 months or 6 years, nobody knows for sure. But until it does, the stock market will remain volatile and dangerous.

    U.S. Secular Bear Markets: 1906-1921, 1929-1949, 1966-1982, 2000-?

    If you are young and have a modest account balance, you can dollar cost average through the ups and downs of this market and you will be fine in the long run.

    But, if you are within 10 years of retirement or have amassed a considerable sum you should not have more than 20% invested in equities unless you have a personal Professional Investment Advisor “actively” managing your investments. Preservation of capital should be your goal in the current environment. There is a distinct probability we will see a 30-50% market decline before this cycle is complete.

    I side with Joe unless you can find an Investment Advisor you can really trust. BTW- Financial Planners are not by default Registerd Investment Advisors, neither are Brokers. The fiduciary responsibility is significantly different amoung the three.

    • joe

      Thanks for agreeing with me. You made my year.

    • Leo Cesna

      You’re very welcome Joe,

      My sole desire is to help others avoid costly mistakes. I have dedicated my practice to this cause in the hope that it will bring prosperity to others who will in turn help those less fortunate.

      Thanks for the encouraging comment!

  4. joe

    Obviously you are well informed about economics through education. I’m on the other end of the spectrum and self taught. We seem to have come to identical conclusions.

    I’m of the same mind set as you in terms of trying to have people avoid costly mistakes. But people believe there is a free lunch and ignore me.

    I considered myself very rich when I retired. Not in terms of yachts, cars and houses. I became rich when I decided, enough is enough.

    Despite the fiscal cliff, Obama Care, slashes to Social Security, cuts to pensions, higher taxes, higher COLA, etc. I will do well. My concern is for the other people that are not so well insulated from the economy. Thus I comment knowing that I will not be popular.

    Now, I have a sure fire way to make money in the stock market. I sell a stock and you buy the same one. When I buy a stock, you sell. YOU will make money every time. L0L

  5. Roger Garber

    I have invested in mutual funds using the Sound Mind Investing program for many years. You can learn about them here

    Good Luck

  6. Sun

    Our work gives us a match on our 403(b) (non-profit version of 401(k)) using the Vanguard Target Retirement Fund:

    What I like about the fund is:

    1) It has a very low expense ratio. I have the VFORX and the ER is 0.19%
    2) It self-adjusts over time. The closer you get to retirement age (2040 in my case), the investments will become less aggressive, less risky.
    3) It is passive investing and you just set-it-and-forget-it.