Stocks, Bonds, Mutual Funds

Mutual funds are an excellent way to invest in stocks, bonds and other securities. They are a good choice of investment because:

• They are managed by professional money managers, so most of the investment research is done for you. (Most investors don't have the time or know-how to do all the necessary research.)

• You diversify your investment risk by owning shares in a mutual fund, instead of buying individual stocks or bonds directly.

• Transaction costs are often lower than what you would pay if you invested in individual securities (the mutual fund buys and sells large amounts of securities at a time).

Before getting into our discussion of mutual funds, there are three important points to keep in mind:

1. Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims. Many publications recommend mutual funds based only on past performance.

2. Mutual funds are not guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank's name, there is no guarantee. You can lose your investment.

3. All mutual funds have costs that lower your investment returns. Thus, even an index fund that mirrors a broad market index cannot perform as well as its mirror index, since the fund has transaction and operating costs that the index does not.

Once you determine your asset allocation model, you can implement the recommended portfolio with mutual funds. You need only six to ten funds to achieve diversification and your asset allocation objectives, as opposed to having to buy many more individual securities to achieve the same results.

Once you identify the asset classes that will be represented in your portfolio, it's time to select specific funds in those categories-i.e., funds that meet your investment goals. To choose wisely, it's necessary to assess:

• A fund's risk/reward history and characteristics, which should match your own financial profile;

• A fund's philosophy and investment style, which should match your own investment goals;

• A fund's costs, including loads and ongoing expenses; and

• The customer service available from the fund.