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3 Tips for Mutual Fund Millions

It will surprise no one that 70% of America's richest households own stocks. But did you know that 68% own funds?

That's right. For all of the hubbub over Donald Trump and his real estate empire, TNS Financial Services' annual report on America's millionaires found that only 46% had investment property.

They were also borrowing less, cutting their average debt by 8% from 2004 to 2005 and, according to TNS, following a conservative, long-term strategy for wealth accumulation.

How to be a rich fund investor
How remarkably encouraging. Why work to become a stock-picking genius when riches come to those who patiently invest in the best mutual funds? Not that stock investing is a bad pursuit. I love it. But the data says that Fools don't  have to learn the art and science of picking stocks to earn great wealth.

Of course, this truism comes with a massive caveat. Fully three-quarters of mutual funds will destroy your wealth rather than enhance it. How can you tell the chumps from the champs? Here are three tips taken from our Fool.com series covering the basics of fund investing:

1. Keep it cheap. All funds charge an annual fee called an expense ratio. But some funds charge more than others. Interestingly, there's zero correlation between the size of the expense ratio and the degree of market outperformance. For example, AIM Charter B (BCHTX) charges 2.01% annually but has lost to the market over the past five years. CGM Focus (CGMFX), by contrast, charges just 1.02% but, thanks to top holdings like Petrobras (NYSE: PBR  ) and Research In Motion (Nasdaq: RIMM  ) , has walloped the S&P by more than 17 percentage points per year since 2002.

2. Say no to loads. You don't need sales charges, known as loads, either. Once again I refer you to AIM Charter B. Its stiff fees mean that you'll lose out no matter how well picks like Teva Pharmaceutical (Nasdaq: TEVA  ) and Caterpillar (NYSE: CAT  ) continue to peform.

3. Cut the fat. More insidious are funds that are no longer accepting new money but still charge a 12b-1 fee to cover marketing expenses. MainStay Equity Index (MCSEX), which has large positions in Altria and AT&T (NYSE: T  ) , is a prime example. It charges 0.25% annually for promoting a fund you can't buy and which, after expenses, has narrowly lost to the market since 2002.

Follow the money
Stock picking is an acquired skill that can be learned with time and effort. But you needn't have that skill to get rich. Substantial wealth can also be acquired through top funds.

Need help getting started? Let me introduce you to Shannon Zimmerman, who leads our Champion Funds service and co-advises Motley Fool Green Light, our personal finance guide that's loaded with money-making tips for investing newbies. Click here to get 30 days of free access to Motley Fool Green Light. There's no obligation to subscribe.

This article was originally published March 5, 2007. It has been updated.

Fool contributor Tim Beyers didn't own shares of any of the companies mentioned in this article at the time of publication. CGM Focus is a Champion Funds recommendation. GlaxoSmithKline and Petrobras are Income Investor picks. The Motley Fool's disclosure policy won't load you down.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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