Management Co. and Arvai & Associates in Troy, Michigan, puts clients into four categories, ranging from conservative to very aggressive. “A conservative investor might have only 20% of a portfolio in stocks and stock funds,” he says, “while a very aggressive investor might have nearly everything in equities for long-term growth.”
For conservative investors, Arvai recommends funds such as American Century Ginnie Mae Fund (BGNMX) among the selections in the category, which invests in mortgage-backed securities with a federal government guarantee. This fund, which Morningstar calls a “let-you-sleep-at-night fund,” recently had a yield of 5.6%. That was enough to earn Morningstar’s top five-star rating, and over the past decade it has had only one down year — a 1.7% loss in 1994.
Such information on mutual funds is available on the Internet, so individual investors can play an active role in picking a well-balanced portfolio of funds. “I look at the Morningstar categories (at www.morningstar.com) to develop a diversified portfolio,” says Wilkinson. “Within those categories, I pay attention to funds’ risk levels, aiming for those with good long-term performance, but medium risk.”
Wilkinson has arranged for automatic investments into some of her mutual funds. “That’s a good way to force myself to invest regularly,” she says. “Moreover, you benefit from dollar-cost averaging.” That is, if you invest periodically, you catch market lows as well as highs, reducing your overall cost per share, boosting your gains, and minimizing losses.
So far, this method has paid off for Wilkinson. “Overall, my port
folio was up modestly for the past two years, despite the bear market,” she says. Among her winners are Goldman Sachs Short Duration Government Fund (GSSDX), which posted returns of 8.2% and 8.4% in 2000 and 2001, respectively, as well as continuing gains in the first half of 2002; and Mutual Shares Fund (TESIX), an established mid-cap value fund that boasted a 13.4% return in 2000 and a 5.9% gain last year.
As a general rule, when buying a fund for the long-term, Arvai says investors should learn about a fund manager’s style to picking securities. He prefers managers who have been with a fund at least five years, although he will consider a manager who has compiled an outstanding record elsewhere. He also looks for excellent performance relative to other funds in the same asset class.
ESTABLISH A LIFETIME PLAN
There’s more to long-term mutual fund investing success than buying attractive funds that follow various styles. You also need a plan to determine which funds to hold and when to sell. “A sell strategy is just as important as a buy strategy,” says Spradley. “Some people sell a fund whenever it has had a bad quarter then move into a hot fund. They may be buying high and selling low, which will not produce good long-term results.”So when should you sell? “You should have two or three reasons to buy a fund,” says Spradley. “When those factors are no longer in place, it may be time to sell.” Reasons to sell could include a change of managers,