Investors who are thinking of retirement will commonly want safe long term investments. Likewise investors who lost a sizable portion of their portfolio in the 2008 market crash will prefer safety to risk. For those who want someone else to manage their money here is what NASDAQ says about how to build your long term investment portfolio in regard to mutual fund strategies.
Mutual-fund portfolios geared for long-term investing come in all shapes and sizes. But those built for success share one common thread: They’ll take into account your age, existing assets, income needs and risk tolerance.
The problems with mutual funds are the fees and expenses. Management fees typically run from 0.5% to 1% of assets per year for the fund manage. Then there are administrative costs of the mutual fund company and fees and commissions for buying and selling equities. This last set of fees is what you would incur if managed your own portfolio. Expense ratios run from 0.2% to 2% for mutual funds. Do these funds earn enough on your money to justify the expense?
Mutual Fund Performance
The best performing mutual funds can grow an investment seven fold over a decade. (Remember that this figure may be before expenses are deducted but even a six fold increase is good.) Barchart provides a list of top performing mutual funds based on a ten year change. Their list contains 250 mutual funds. The best performing is Amg Managers Emerging Opportunities Fund which finished a decade at 741.58% of starting value. On the other hand number 250 on the list is Allianzgi Wellness fund Class C which came in at 148.35% of original value after a decade. In this case fees probably wiped out any gains. CNBC looks at the dozen worst mutual funds. Oppenheimer Commodity Strategy Total Return experienced -14.61% annualized losses over five years and had an expense ratio of 2.12%. The point of this being that Mutual Funds are not necessarily safe long term investments! Returns vary from fund to fund and you are paying a percent or two every year even when the fund loses 15%!
Safe Long Term Investing
Profitable long term investment hinges of sound intrinsic stock value analysis before you buy and routinely as you hold the stock (or mutual fund investment).
The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation. The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.
Basic long term safe investing requires that you know enough about a company to understand how they make money and how they will continue to make money over the years. Look at a company’s financials to confirm that they are doing well and not overly saddled with debt. And once you buy the stock make sure to repeat this process periodically in order to decide whether to keep or sell the stock. If you want let a mutual fund handle your money treat them like you would a stock that you want to buy. Look at their long term results. Keep track as you go. Don’t let one bad year make you leave a good fund but don’t stay with a continual loser no matter what excuses they give.