A 21-year-old named Jim wants me to recommend a portfolio of mutual funds for long-term appreciation. He has $15,000 to invest.
Answering a question like that can be a trap. Before replying I should really know the answer to such questions as:
Does he have adequate insurance - health, life (if someone is dependent on his income), homeowners (if he owns a home), auto (if he owns a car)?
Does he have an emergency fund - to cope with financial crises like the loss of a job or a health expense not adequately covered by insurance?
Does he have a steady job or steady source of income? Indicating that there is less chance of a financial emergency?
Does he intend to watch his or her portfolio like a hawk? Or like a bat? Funds should be followed. Would you sit still if Hothand Harry left your fund to start a hedge fund and was superseded by a 23-year-old Harvard Business School graduate? You can't just file it and forget it. That's why, if you don't plan to stay on top of things, you might hire a money manager - or, better, subscribe to a newsletter that provides and monitors a model portfolio. (Morningstar FundInvestor provides three model portfolios, for example.)
Is he somewhat accustomed to volatility? Or might he panic and sell if the $15,000 suddenly shrank to $14,500? What is the person's “risk tolerance”?
So, a suitable answer to the question might range from a very conservative fund (like Fidelity Asset Manager: 20) to a somewhat aggressive fund (like Excelsior Value & Restructuring).
Now, the Bible so far as mutual fund investing is concerned is Morningstar Mutual Funds, a newsletter that can be consulted in larger libraries. In every issue you will find fund ratings - which are not to be ignored, although they are just a starting point. You will also find a list of recommended mutual funds - funds where, for example, Hothand Harry hasn't run off to make more money.
You should also read up on mutual fund investing in general. I hate to appear immodest, but the very best introduction to mutual funds is a small book I wrote years ago, Barron's “Keys to Investing in Mutual Funds.” As I am wont to say, it is not only the best introductory book on mutual funds; it is a notable contribution to Western literature and to Western thought.
Enough shilly-shallying.
You should build a diversified portfolio with your $15,000. Don't stick it all in one fund. But choose one that might turn out to be your core holding - the one with the majority of your money.
Of the many, many wise choices you have, one is a Vanguard target-retirement fund - the date roughly coincides with the year you plan to retire. (That might be 2050, when you will be 64.) This fund invests in index funds, an index being a mirror of an investment market. Index funds are usually low-cost, and well diversified, so they won't blow up in your face. A target-retirement fund automatically becomes more conservative as the years go by, moving from stocks to bonds.
So, 43 years from now, you will probably be sitting on a vast fortune.
I suggest that you use some of that money to hoist drink in my memory.
By the way, to buy a mutual fund, call the 800 directory, 800-555-1212, for the phone number of the fund family. Phone the fund and ask for a prospectus and a directory; and indicate whether the investment is for a retirement account or not. With the application, ask that distributions--interest, capital gains, etc.--be invested in more shares.
Answering a question like that can be a trap. Before replying I should really know the answer to such questions as:
Does he have adequate insurance - health, life (if someone is dependent on his income), homeowners (if he owns a home), auto (if he owns a car)?
Does he have an emergency fund - to cope with financial crises like the loss of a job or a health expense not adequately covered by insurance?
Does he have a steady job or steady source of income? Indicating that there is less chance of a financial emergency?
Does he intend to watch his or her portfolio like a hawk? Or like a bat? Funds should be followed. Would you sit still if Hothand Harry left your fund to start a hedge fund and was superseded by a 23-year-old Harvard Business School graduate? You can't just file it and forget it. That's why, if you don't plan to stay on top of things, you might hire a money manager - or, better, subscribe to a newsletter that provides and monitors a model portfolio. (Morningstar FundInvestor provides three model portfolios, for example.)
Is he somewhat accustomed to volatility? Or might he panic and sell if the $15,000 suddenly shrank to $14,500? What is the person's “risk tolerance”?
So, a suitable answer to the question might range from a very conservative fund (like Fidelity Asset Manager: 20) to a somewhat aggressive fund (like Excelsior Value & Restructuring).
Now, the Bible so far as mutual fund investing is concerned is Morningstar Mutual Funds, a newsletter that can be consulted in larger libraries. In every issue you will find fund ratings - which are not to be ignored, although they are just a starting point. You will also find a list of recommended mutual funds - funds where, for example, Hothand Harry hasn't run off to make more money.
You should also read up on mutual fund investing in general. I hate to appear immodest, but the very best introduction to mutual funds is a small book I wrote years ago, Barron's “Keys to Investing in Mutual Funds.” As I am wont to say, it is not only the best introductory book on mutual funds; it is a notable contribution to Western literature and to Western thought.
Enough shilly-shallying.
You should build a diversified portfolio with your $15,000. Don't stick it all in one fund. But choose one that might turn out to be your core holding - the one with the majority of your money.
Of the many, many wise choices you have, one is a Vanguard target-retirement fund - the date roughly coincides with the year you plan to retire. (That might be 2050, when you will be 64.) This fund invests in index funds, an index being a mirror of an investment market. Index funds are usually low-cost, and well diversified, so they won't blow up in your face. A target-retirement fund automatically becomes more conservative as the years go by, moving from stocks to bonds.
So, 43 years from now, you will probably be sitting on a vast fortune.
I suggest that you use some of that money to hoist drink in my memory.
By the way, to buy a mutual fund, call the 800 directory, 800-555-1212, for the phone number of the fund family. Phone the fund and ask for a prospectus and a directory; and indicate whether the investment is for a retirement account or not. With the application, ask that distributions--interest, capital gains, etc.--be invested in more shares.
