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How To Pick The Best Mutual Fund – The Ultimate Guide

By Jason Markum

Picking individual stocks for your portfolio can be really difficult under the best of circumstances. Under the worst of circumstances it can be downright dangerous because if you make just a few bad choices you can lose your shirt quicker than you would think.

One way to save yourself from the dangers of investing in individual stocks, or even of investing in the stock market at all is to invest primarily in mutual funds. The problem then becomes, which mutual fund should you select? There are thousands of mutual funds and it can become a dizzying exercise in futility to pick the right one. Fortunately that is exactly what I’m going to talk about with this article today.

In order to select the best mutual fund for you and your specific portfolio requirements and risk aversion, you should follow five basic rules.

Those rules are one, diversify; two, analyze the funds performance over a very long period of time; three, look for funds that have a continuity of investment styles; for, use your money funds wisely if at all possible; and five, recognize any mistakes that you have made, cut your losses and move on.

Let’s talk about diversification. Everybody knows that you should diversify your stock portfolio, but most people don’t realize that you should also diversify your mutual funds. I recommend you pick at least three different mutual funds depending on your exact investment needs.

Now let’s talk about analyzing performance. You should evaluate the mutual funds performance over long periods of time and under different market conditions. All mutual funds do good during bull markets, but you should look to see how well your fund did during the last two or three recessions before you get the real picture about how well the fund will handle things in the future.

To say just a word on the continuity of style; you should always read mutual funds annual reports as well as proxy statements. From those reports you’ll see if your mutual fund has shifted its investment style drastically over the years and if they did then why did they do that? It probably means that what they were doing wasn’t working. You want a fund that has done the same thing for many years with success and hasn’t had to jump from fad to fad in order to find success.

I won’t say much about the rule about using your money funds wisely but you should find a money market fund that invests in the most secure things possible especially in light of the current recession and financial crisis or meltdown as it has been termed by some.

Finally recognize any mistakes and get the heck out of there. This one should be self-evident. We all make mistakes even in choosing bad mutual funds and it won’t take you very long to determine if this has been the case for you. If so, don’t wait for the market to turnaround in order for you to make your profits back, just cut your losses and find a better mutual fund.

So there you have five simple rules that you can use to help you pick the best mutual fund.

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