What is a mutual fund?

For decades, mutual funds have been a part of the investing landscape. They are easy to use, are available in a wide range of investment options, and are generally accessible to everyone. Mutual funds offer a safety in numbers approach that benefits the investor in numerous ways by spreading risk, offering diversity, and for better or worse, a mutual fund manager to guide the process. Read the full article here.

Five Investment Questions for 2010

Should you consider past results? By all means.
Is longevity important? Yes, but not necessarily the fund’s length of service.
Does size matter? How do you determine size would be of greater importance.
Who’s your Daddy? The larger the company the greater the likelihood your fund has orphan funds embedded in your portfolio.
How so do you diversify? A little of this, a little of that

Most of us look at the turn of a calendar year with the hope that the investment mistakes we made in the previous year will not be made in the new one. This is noble and in many cases futile. These attempts are usually too difficult to handle, which is why, in many cases you haven't done anything before this point.

But with little effort, you can change how you invest. For the vast majority of us, investing requires far too much time. It requires continued education (which I fully recommend), frequent monitoring (which can involve little more than opening your statement just to make sure your investments are going where you intended) and a clear-cut understanding of where you are on the timeline (beginning to invest or at it for awhile).

Altering bad investment habits is not that difficult. Five Tips for 2010...

Paul Petillo is the Managing Editor of Target2025.com

Why Investors Do What They Do: Diversification

In his classic book "Portfolio Selection" co-Nobel prize winner Harry Markowitz describes his topic as something other than securities selection. He suggests that a "good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies."

Diversification often involves numerous human emotions and misuse of it is often the result of some of the topics we have already discussed (loss aversion, narrow framing, anchoring and mental accounting with herding, regret, the impact of the media and optimism all as yet discussed). But diversification is a way to avoid being wrong. It is a way to avoid regret. And when you are wrong, you tend to be really wrong.

These feelings of "wrong-ness" are often the result of events beyond our control. Non-economic influences can derail the best efforts of an investor along with weather, military actions, even the health of the President. As Markowitz suggests: "Uncertainty is a salient feature of security investing".

In order to avoid too many economically obscure references to diversity we will boil the discussion down to two theories: the expected utility theory and the case-based decision theory. The first theory suggests that if the investor is indifferent to an investment, in other words they are so similar that she/he doesn't care either way, that this actually becomes a form of risk aversion and hardly ever produces good long-term satisfaction with those choices.

In the instance of Case-based decision theory, Mohammed Abdellaoui offers the following from his book "Uncertainty and Risk": "it is assumed the decision-maker can only learn from experience, by evaluating as act based on its past performance and on the performance of acts similar to it." This leads to chance decisions.

But what is often overlooked is that not only do you decrease your chances of being wrong, you by default increase your chances of being right. Diversification will spread the risk and as a result of that, may allow you to miss the next hot stock or mutual fund. Because it is impossible to pick the future based on the past - recall the reminder that past performance might not play a role in future results - diversification makes the chances of getting some of the hot property but not all of it.

Consider this simple question: if Rome is located between 41°54' North Latitude, which American city lies at a similar latitude - Boston, Atlanta or Miami? Most folks when asked this question go with either Miami or Atlanta and do so with more than reasonable assurance that they are correct. But Boston, with 42° 21' 29" N is actually the closest by comparison.

Unfortunately, as Robert Hagin author of "Investment Management" points out that people when people make investment mistakes - something that can afflict both professionals and non-professionals, they fail the old adage of "a problem is not what up don't know; it is what you do know."

The most difficult part of investing is removing guesswork and the wishful thinking you may have for the act. Not easy by any means. But much easier if you don't overthink the act of spreading your risk.

Next up: Herding

Retirement Planning - D is for Diversity

D is for Diversity

Diversity creates more problems for retirement investors than we have space here to count. More than one study has revealed that fear of making the wrong choice stops us from making any choice at all. It is no different when you need to make a choice about which mutual fund to put in your 401(k). The problem is, which fund is the right fund?

Many mutual funds often have default investments for new enrollees. This is a way to get you participating without too much effort. But your employer doesn’t always hire the best fund families to run the plan and the choices might be limited. No problem.

The single greatest way to gain immediate diversification is with an index fund that tracks the S&P 500 index of the largest companies. This Goldilocks index – never too hot, never too cold, but just right – is the perfect investment to use as you begin your retirement journey. Once you learn more about how to make your plan work, you will need to diversify to include an index that tracks the rest of the market.

A is for Asset Allocation

B is for Balance

C is for Continuity