Mutual Fund Advice

With the stock market near record territory and rising volatility in global financial markets, there’s no shortage of mutual fund advice on how to master the markets. For most investors sifting through all the advice and tuning out the background noise, the due diligence process can be daunting.

Mutual fund advice, usually in the form of glamour articles praising a fund manager’s success, can be found in financial magazines and newspapers, and even on the Internet and TV. Typically an innovative approach and, of course, past performance of a fund and its manager are promoted. One can read up on everything from funds that specialize in aggressive growth in emerging markets to large cap dividend yield plays.

There are even funds that will sell short stocks in addition to owning shares. These “long-short” funds typically advertise “market neutral” performance — that is an ability to reap gains despite volatility in global markets. Whatever the risk profile of the investor, there is probably a fund out there that will cater to the investor’s appetite.

One particular piece of mutual fund advice commonly heard from personal wealth and money managers is to avoid penny stocks. These tend to be small cap companies that were delisted from major exchanges for a host of undesirable reasons, and their shares, which trade from under $5 to fractions of a penny on the so-called bulletin board exchanges, tend to be illiquid.

This can present a huge problem for an investor who can purchase literally millions of shares for a few thousand dollars, who is suddenly unable to liquidate the position. Most or all of one’s money can be lost on such an exchange due to a low number of participants or illiquid conditions.

Bond investing is a staple of the diversified portfolio, and as with other investment vehicles sought by mutual fund money managers, there are a lot of choices. There are low yield bonds, often issued by government entities, that offer steady returns for little risk. There are higher risk, and thus higher yield “junk bonds” issued by struggling companies or financially uncertain institutions. All of these are available in the long and short term and are priced according to the mechanics of the debt market.