A great and short book on mutual funds:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
It’s written by John Bogle, founder of Vanguard Investments and a big proponent of index funds.
Two key benefits of index funds:
-since the array of stocks that comprise the fund is dictated by the index that it follows, there’s far less management effort involved, which means a much lower expense ratio. Whereas a typical managed mutual fund has an expense ratio of over 1%, index funds are down around 0.1%. That makes a big difference in the long run. If two funds both return 8% annually before expense ratio, then here’s what happens to an initial investment of $10,000 after thirty years:
Managed fund: $10,000 * (1.08 - .01)[sup]30[/sup] = $76,123
Index fund: $10,000 * (1.08 - 0.001)[sup]30[/sup] = $97,868
-an index fund has less turnover/churn. In a managed fund, the manager regularly tweaks the portfolio, selling some stocks and buying others. You end up paying capital gains tax every time one of those component stocks gets sold.
www.morningstar.com is a good site to go to check out the history of any mutual fund you’re considering. You can visit investment company’s websites to read more detail about any given fund (and find the symbol associated with that fund).
Wife and I have considerable investment in VFINX, Vanguard’s S&P500 index fund. It’s done well.
If you want to learn more about general investment strategy, I recommend another book:
The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
The author provides coin toss examples (and historic stock price data) that show why stocks are a smart investment for the long haul, and he also explains why diversifying your portfolio into uncorrelated investments is helpful. On the latter point, he particularly recomments investing in real estate investment trusts (REITs); in addition to VFINX, we have been putting money into Neuberger-Berman’s NBRFX, a mutual fund that invests exclusively in REITs. The share price does OK, but it pays out quite a bit in dividends, which account for a significant portion of the ROI.