Financial Planning for July 2002

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Do Mutual Funds Matter?
Despite a bear market that experts say began last March and might continue for at least another year, compounded by a shaky economic outlook following the tragic events of September 11, sound investment principles such as asset allocation, diversification, and investing for the long-term still make the best sense. Financial planners are asking the question “Should mutual funds, especially equity funds, continue to play a major role in their clients’ investment strategies?” Following these time-tested investment principles, the answer will always be yes.

Good financial planners learn as much as possible about their client’s financial life, determine their goals and timeline, and map out a long-term strategy to achieve their clients’ goals. But, given the benefits, almost any portfolio should include Mutual Funds. They offer the simplest and least expensive method of investing and you get full-time professionals managing your money to boot. What a deal. Historically, for those with a long investment horizon, equity mutual funds have earned far greater returns than other investment vehicles. Mutual funds have become so popular that over 50% of all U.S. households own one.

Once planners are ready to implement investment strategies for clients, the first issue to look at is whether to place assets in funds with passive or active management, or a balanced combination of the two. Passive investing is investing in an index fund that tracks the market, rather than trying to beat it. This can be an ideal way to diversify, keep fees low and be tax-efficient for core holdings. The key with this approach is to stay the course. Don’t try to time the market or swap funds. Historically, statistics have proved that this is the best approach for long-term core holdings.

There can be merit in investing actively for certain non-core assets. For active funds the key is to invest in the fund manager. What is her/his background and knowledge in the asset class under management? Also, look for no-load funds with a long track record, tax sensitivity and a philosophy of sticking with their asset class. The key to putting your money in active funds is to research as much about the fund and its managers as you can before you jump in.

Be aware of the red flags in all types of funds. These include funds that don’t have a great track record, the “style drifters”, and funds that are too heavily weighted in one industry. We suggest you stick to what works.


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