Faced with a bewildering assortment of investment choices, millions of investors have turned to mutual funds as the investment of choice for their retirement savings. Why? Because mutual funds allow investors to easily assemble a diversified portfolio of stocks and bonds at a reasonable cost.
For more than two decades , SMI has used such funds — with great success — as the basis of our model portfolios.
The story is told of the time Abraham Lincoln received an invitation to deliver a college commencement address. Because the exact date had not yet been set, the college inquired as to how much notice Mr. Lincoln would need to have time to prepare. “The answer” he said, “depends on how long you wish me to speak. If you want me to talk for just 15 minutes, I’ll need three weeks’ notice. If it’s for an hour, I’ll need only three days’ notice. If you’ll let me speak all day, I can start right now!”
The point behind Mr. Lincoln’s humorous answer is that to be economical in one’s presentation, while still covering all the essentials, requires a great deal of preparation. I thought of Lincoln as I was reviewing all the books in my investment library written solely on the subject of mutual funds. I have 26 such books; they average more than 250 pages each! Can I hope to teach you more about mutual funds than is already covered in those 26 books? Probably not, especially when you consider that they run collectively to more than 6,500 pages!
So I’m going to do something that may be even more valuable — teach you less. I’m going to mercifully leave out a lot of material best reserved for a more in-depth study, and instead focus only on those things you need to know about mutual funds to benefit from them. Put that way, there really isn’t much to learn! This article will serve as a primer, and a primer teaches only the basics.
One thing more before we begin. The fund industry has experienced explosive growth over the past 30 years. The sheer number and types of different funds (more than 8,500 currently) is overwhelming. As a result, I find that many people feel confused, if not intimidated, by the whole topic. That can be a problem for SMI readers because all of our investing strategies rely heavily on mutual funds. But take heart! This primer has been written especially for you beginners. Remember, what you really need to know about mutual funds is not all that detailed. Ready? Let’s get started!