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Mutual fund rules of thumb

- Alan Lavine and Gail Liberman

Stick with mutual funds that are commission-free and sport low expenses. The lower the fees, the greater your return over the long term.

Some of the lowest-cost mutual funds are offered by Vanguard Group and TIAA-CREF.

Diversify your investments. Stocks are riskier than bonds. Bonds are riskier than cash investments like U.S. Treasury bills. Lower your risk by owning all three types of investments. Also consider investing in inflation hedges, like precious metals and real estate stock funds. Compare the performance of several funds year by year. Pick the fund with the best return and the lowest swings in annual performance. Ideally, you want the lowest cost, least risky and best performing fund.

Keep high-yield investments, like bond funds, in your tax-deferred retirement savings accounts. Meanwhile keep your stock funds that pay little or no dividends in taxable accounts for the long term. If you are in a high tax bracket, invest in tax-free municipal bond funds. At today's rates, someone in the 35 percent tax bracket could earn a taxable equivalent yield of more than 4 percent in some tax-free funds.

Invest regularly in your funds. You can have money automatically deducted from your checking account and invested in mutual funds. Invest monthly over the years, and the average cost of the investment should be lower than the market price when you sell.

Make sure you talk with an attorney about how you want your loved ones to inherit your investments. There are a lot of tax considerations to review. Stay informed about the financial markets. Read the financial news. Subscribe to an investment newsletter, like the No-Load Fund Investor, Potomac, Md. The report has model portfolios you can use based on your investment comfort level.

Read your mutual fund annual and semi-annual reports. These reports discuss how the fund is managed.

Consider selling a fund for the following reasons: It has underperformed similar funds over the past three years; the fund manager leaves or is replaced; or the fund has been sanctioned by the Securities and Exchange Commission for sleazy practices.

Consider low-cost index funds that track the market averages. Index funds typically outperform at least 50 percent of all actively managed mutual funds over the long term, according to Morningstar Inc., Chicago.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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