Mutual Funds - Finding the Best Mutual Funds for You
The holy grail for most mutual fund investors is to find the list of the best mutual funds. It’s one of the most searched for terms in the search engines as related to investing. But few investors stop to think about what it means to be the best mutual fund. What is the best for one investor may not be the best for another.
For many investors, at first blush it is obvious that the best funds are those that give the highest returns over time. While this may seem obvious, what is not as obvious is that those funds are often the most volatile funds as well. One should not underestimate the impact of volatility. A fund who’s value is up and down a great deal on a daily basis is a fund that is often sold at the lows and both at the tops. In theory we can hold onto volatile funds, but it’s a lot harder when it’s your portfolio that is varying wildly on a daily basis.
So for other investors we may determine that the best mutual funds are those that have low volatility. This is traditionally thought to be the case for older investors closer to retirement, where large swings in portfolio values are more damaging because they are drawing down their savings and won’t have as much time to wait for a market recovery.
One traditional way to minimize volatility is to diversify your portfolio. But that requires more than just holding multiple mutual funds in your account. A truly diversified portfolio has multiple holdings that are not correlated to one another, that is they move up and down together on a daily basis. That is the basis for the classical advice to continually increase the bond funds as a percentage of your portfolio as you get older.
One of the all time favorites for this is the precious metals group, specifically gold funds. Historically, health care funds and real estate funds are a couple of the best funds to diversify your portfolio.
It turns out that if you can find a few funds that are not correlated, then in a properly balance portfolio you can get the high return of the more volatile funds, but with an overall portfolio volatility that is closer to the traditional low volatility funds.
One great source for finding uncorrelated funds is to use sector funds. the largest group of these is the Fidelity sector funds, known as the Fidelity Select family. There are over 40 of these funds available, so there is almost always one that is in an uptrend, and many of these are not correlated to one another. There are choices from cyclical funds, precious metals, utilities, and high tech and computer funds. The one limitation to be aware of is that they must be held for 30 days or you must pay an early redemption fee.
The Select fund family is a great choice to diversify your portfolio. Get a prospectus, talk to your advisor, and see if they deserve to be part of your investment strategy.
Finding the best mutual funds is not always a straightforward task. Each investor will have specific needs that will help determine the funds that are best for him.
Tags: Fidelity sector Funds | Fidelity sector Funds | best Fidelity funds | best Fidelity funds | mutual funds
August 23rd, 2008 at 5:03 pm
Buying the GLD and SLV ETFs is a much safer bet than investing with a leverage. You need to be aware that not all precious metals dealers/investment firms can be trusted. Monex Deposit Company has been financially raping its clients for tens and even hundreds of thousands of dollars for over 40 years by intentionally over-leveraging and extremely poor money management. Unlike most investment firms they are NOT government regulated. They especially prey on those who not only don’t know the truth about Monex, but who don’t have any or enough experience trading. Precious metals can be a good investment but be careful who you do business with is all I’m saying.