By VICTOR REKLAITIS, INVESTOR'S BUSINESS DAILY
Posted 01:47 PM ET
Article from investors.com
Investor's Business Daily features a wide range of promising growth stocks every day, but it's also smart to have some mutual funds in your portfolio.
And just like with stocks, IBD has some long-standing views on how to go about investing in mutual funds.
Today's Investor's Corner column will go over some of those views, which aren't featured that often in this space.
You'll get more mutual funds-related information in the next few columns. With the next edition of IBD, Investor's Corner starts a series looking at mutual funds and other institutional investors.
So, should you handle a mutual fund investment in the same way you would manage a stock picked using IBD's CAN SLIM investing strategy?
In a word: no.
"When you purchase a mutual fund, what you're buying is long-term professional management to make decisions for you in the stock market," IBD's founder and chairman, William J. O'Neil, wrote in his best-seller, "How to Make Money in Stocks."
"You should probably handle a mutual fund differently from the way you handle individual stocks."
One key difference is that with growth stocks, it's critical to have a rule that will force you to cut your losses quickly, such as whenever you are down by 7% or 8%.
With mutual funds, on the other hand, patience is the name of the game.
"The big money in mutual funds is made by owning them through several business cycles," wrote O'Neil in a chapter titled "How You Could Make Your Million Owning Mutual Funds."
"This means 10, 15, 20, or 25 years or longer. Sitting tight for that long requires enormous patience and confidence."
No Charts Needed For Funds
Another big difference is in the area of timing your buys.
With growth stocks, the CAN SLIM approach recommends jumping in when a stock is in a proper buying range.
That can be established by a buy point from a base (an area of price consolidation), or from a rebound off the stock's 10-week moving average.
With mutual funds, you don't necessarily need to look for a buy zone on a chart. Just pull the trigger.
"Anytime is the best time," O'Neil says. "You should focus on getting started and becoming regular and relentless about building capital that will compound over the years."
It's smart to pick a diversified domestic growth fund that performed in the top 25% of all funds in the past three to five years, according to O'Neil.
But don't make the mistake of buying into the past year's big winner. That can come back to bite you.
O'Neil has noted that history suggests a winning fund probably will show much less impressive gains in the next year or two.
Keep in mind that one advantage with mutual funds is that they can take care of some dirty work for you, especially when it comes to investing overseas.
For many retail investors, it can be complicated to invest in foreign companies that aren't listed on U.S. exchanges.
But you can easily get exposure to such companies by investing in a mutual fund with stakes in those firms. The fund takes care of the details for you.
Article from investors.com