Building A Fund Portfolio Continued

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Evaluating Mutual Fund Performance

One approach to benchmarking is the use of market indexes, which track the performance of a specific group of securities. While the Dow Jones Industrial Average is perhaps the best-known market index, it is not used as a mutual fund benchmark as frequently as some of the other indexes listed in the table.

In addition to comparing a fund’s performance with the return on a relevant index, investors can also compare the fund’s performance with that of a group of similarly managed mutual funds. For example, a fund focusing on large-cap value stocks may be compared to the average performance of all other large-cap value funds.

The fund’s annual and semi-annual reports and prospectus should provide both of these comparisons for you. A variety of investment research sites on the Internet also furnish this information.

When comparing funds to benchmarks, take a long-term perspective. Even the best portfolio managers are not able to exceed their benchmarks over every time period.

Focusing Your Investment Strategy

Invest for the long term.
The more time you give your investment to grow and compound, the more likely you are to reach your financial goals. History shows that patient investors who focus on long-term goals can withstand fluctuations of the stock market.

Use time, not timing.
If you start early and invest regularly, you will be able to use time to your advantage. Do not try “timing” decisions to buy and sell based on the market fluctuations. No one has accurately predicted the market fluctuations over the long term.

Keep emotions out of your actions.
Investors tend to be motivated by emotion based on short-term variables and the latest news. Think and act intellectually, not emotionally. Investing success requires patience, stamina and an unemotional approach. Do your homework; then stay on course.

Increase your knowledge.
Learn all you can about investing and specific investments by regularly reading business periodicals, investment books and annual reports of companies whose securities you might want to purchase.

Avoid high-risk investments.
Avoid futures, commodities and other risky forms of investing — at least until you know all about them and you are willing and able to accept their increased risks.

Avoid the crowd.
If you choose your investments by leaping into whatever is currently doing very well, you may be setting yourself up for recurring losses over time. You could find that the best performing stock in 1 year becomes one of the worst in subsequent years.

Diversify.
Select a wide variety of securities for your portfolio to minimize investment risks. Experts suggest that diversification can reduce the total risk of investing by more than half. Investing in several assets will produce a return based on the average of your various investment returns, rather than relying completely upon the return of one investment.

Evaluate your investment plan.
You should evaluate your investment plan annually or at times of significant life events. If necessary, rebalance your portfolio to ensure your mix of investments aligns with your goals, risk tolerance and the time horizon.