See whether any of the following conditions fit you:
- You don't have faith in your ability to invest most effectively.
- Your track record investing in individual stocks is a little embarrassing.
- You haven't been saving and investing as much as you should, and you've fallen behind.
- You don't think you have what it takes to be an astute stock picker -- discipline, diligence, time, and so on.
- You just aren't that interested in learning to be an astute stock picker.
- You worry that you aren't investing effectively enough to be able to retire comfortably later on.
If you see yourself in some of the above, you should consider investing in mutual funds. (Actually, all of us should consider doing so.) For many years now, here in Fooldom, we've advocated broad market index funds for most investors. (Learn more in our Index Funds area and in this article by Bill Mann.) They're simple, inexpensive, and a great way to be instantly invested in many terrific companies. Best of all, they deliver average market returns to you. If the stock market soars one year, your investment will soar just about as much (and vice versa, of course).
Be better than average
But you needn't settle for average. It's true that most mutual funds do worse than the market average, what with their relatively high expense fees, turnover, commission costs, etc. (Can you believe it, though? The vast majority of managed stock funds, run by rather bright people, just can't keep up with the market average!) Still, it's not all funds that underperform. There are a bunch of funds that shine -- and they can help your portfolio make up for lost time. The trick is just to find them. And I'm talking here about funds that have solid long-term track records and smart, rational managers.
You can find these funds on your own. They do exist. It doesn't hurt to get a little help, though, does it? I know I'm not the most unbiased person here, but I find our Motley Fool Champion Funds newsletter quite informative and useful. In a little more than a year, it has recommended more than 25 stock and bond funds, and overall, they've more than doubled the returns of their respective benchmark indexes.
Not all have delivered eye-popping results, but it's still too early to evaluate their performance. Some have really zoomed in a few months, though -- such as Dodge & Cox International Stock (FUND:DODFX), which is up about 35% in a little less than a year, and T. Rowe Price New Horizons (FUND:PRNHX), a small-cap growth fund that has advanced about 12% since being featured in the October issue.
See the difference
You can do just fine with an ordinary index fund, such as the Vanguard 500 Index Fund (FUND:VFINX). Over the past 10 years, its annualized average return is 10.2%. Not too shabby. Here's what $10,000 would grow to at 10.2% over 10, 20, and 30 years:
10 years: $26,413
20 years: $69,764
30 years: $184,267
Pretty good, eh? Of course, if you have more money invested, your nest egg will be more ostrich-like and less finch-like. $50,000 invested for 25 years at 10.2% will become about $566,904.
Look at some alternatives, though, to see what might happen if you invest in some above-average funds (perhaps simply in addition to investing in a reliable index fund). The Vanguard Windsor II (FUND:VWNFX) fund, for example, was recommended in last July's issue, and has since advanced almost 13%. Its 10-year annualized return is 12.2%. Let's see what a difference those two percentage points of return can make with a $10,000 investment:
10 years: $31,618
20 years: $99,967
30 years: $316,072
You're watching the miracle of compounding. Those two little points would have earned you more than an extra $125,000 over 30 years! Plunk in $50,000 for 25 years, and you'd get $888,774.
Can you do better? You just might. Look at the Third Avenue Value (FUND:TAVFX), recommended about a year ago and up 23% since then. Its 10-year annualized return is 14.8%. Here's what that would do to $10,000:
10 years: $39,654
20 years: $157,242
30 years: $623,522
And our $50,000, 25-year investment? It would grow to more than $1.5 million. (Third Avenue Fund is invested in firms such as Kmart, St. Joe, Legg Mason (NYSE:LM), and MBIA (NYSE:MBI).)
So. what now?
Here's what I'd like you to take away from this:
- Your financial future needn't be so shaky. Mutual funds can help you sleep easier at night. They can get your portfolio moving in the right direction with relatively little effort on your part.
- If you spend a little time finding above-average mutual funds, you can earn better-than-average results, which can make a big difference in your eventual wealth.
- You can find these funds on your own, by doing online searches and screens, by reading various financial publications, or by giving our Motley Fool Champion Funds newsletter a whirl. Right now you can try it for free, and that will permit you to peek at all the recommended funds and to see how they've done.
- Little percentage points count -- a lot. Aim for the best returns you can get because they can make a world of difference when you cash out.
Here are some other things to keep in mind:
- Don't rely too much on any fund's three-year or five-year or 10-year average return. It's just an average return over certain past years, and isn't likely to be the exact return you get over the next years. You might do better or worse over the period in which you invest in the fund. Still, a good long-term record suggests that those at the helm know what they're doing.
- Remember that the ultimate amount of money you accumulate is, to some degree, up to you. You could invest a lump sum now and let it grow, or you could invest it and also keep adding to it over time. The more you invest and the longer you remain invested, the more your money is likely to grow.
Do something!
Whatever you decide to do about your investments for the future, do something. Too many of us just keep putting things off. Learn a lot more about investing and carefully pick stocks on your own, if you wish. Or plunk your savings into an index fund and call it a day. There's no shame in that. Or leave your money in the hands of money managers you trust, via carefully selected mutual funds.
Of course, if you want to do even better than an index fund, you probably can. Though most managed mutual funds don't beat index funds, many do. It's just a matter of finding the right funds. I've written about promising funds in the past, as have some colleagues:
You can learn a lot about investing in mutual funds by reading through our Mutual Fund area and these articles by Shannon Zimmerman:
- Deconstructing Fund Categories
- Slam-Dunk Mutual Funds
- Are Your Funds Worth Owning?
- We're Beating the Market. Are You?
- The Best Funds for Your IRA
Before you invest in any mutual fund, make sure you've studied it well -- either on your own or with some help. We'd love to help you, via our educational Motley Fool Champion Funds newsletter, which you can try for free. Take advantage of a free trial and you'll see all the funds that we've recommended, based on a lot of research presented in the newsletter. You can also see how they've fared since being recommended. (Hint: pretty well.)
Selena Maranjian's favorite discussion boards include Book Club , The Eclectic Library, and Card & Board Games. She does not own shares of any companies mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
