Overview – Mutual Funds an investment that is a collection of hundreds of stocks that provide more diversity than single stocks.
When you open an stockbroking account you can choose where to invest your money.
I believe the best place to invest in a time frame of 5 years+ is in mutual funds.
Mutual funds are a collection of many stocks of companies.
Each mutual fund has a mission statement which the fund will follow.
Mutual funds offer more stability than single stocks and single stocks rise and fall on the value on one company.
Mutual funds rise and falls on the collective value of all the stocks they are composed of.
I only invest in mutual funds of stocks, also called equities.
Be aware that there are also other mutual funds of bonds, reits, risky leveraged stocks, precious metals etc.
Some of these seem to have a large gain in the short term but looking over long term, nothing has kept pace with stock mutual funds.
There are many types of mutual funds across many different stock categories such as transportation, technology, health care, financial, energy etc.
This can be overwhelming when choosing a mutual fund.
Another common type of mutual fund is called an “index fund”.
Often these have no fees to invest and are called a “no load” fund.
These mutual funds follow a particular index.
Some common indexes are:
-S&P 500 – The largest 500 companies on the NYSE or NASDAQ.
-Nikkei 225 – The largest 225 companies in Japan
-Russell 2000 – The largest 1000-3000 companies on the NYSE or NASDAQ.
-Nikkei Mid and Small Cap – Tracks 200 small and medium companies in Japan
-MSCI World – Tracks a collection of stocks from developed countries
-MSCI Emerging Market – Tracks a collection of stocks from the emerging countries
The S&P 500 has been the standard index to which all other funds compare.
Historically it has returned the following until 2016:
-25 Years – 12.48%
-20 Years – 11.86%
-15 Years – 11.48%
-10 Years – 11.57%
-5 Years – 13.96%
As you can see the average is about 12%, which we use in calculations on this website.
There are many opinions about what to expect from mutual fund investment, but as you can see from the data long term you can expect about 12%.
When choosing a mutual fund you can see the historical return of that fund.
S&P500 Mutual funds should match the above data.
The longer the history of the fund, the better.
Mutual funds are already diversified across many different company stocks but it is also a good idea to diversify across different types of mutual funds.
Personally I split my investments across 6 types of mutual funds:
-USA Large Cap
-USA Small Cap
-JAPAN Large Cap
-JAPAN Small Cap
Large Cap means very large companies sometimes known as “Blue Chip” companies, for example S&P500 which is the largest 500 companies.
They would usually have a standard return without a lot of movement.
Small Cap are still publicly traded companies but are smaller.
They have potential for more growth but more risk also.
I split my investing across these funds because the USA is the most developed and proven market, and I live in Japan and I believe we are heading for economic growth here.
I also have some international mutual funds that will increase as other countries economies grow also.
In 2016 I had a return of +23.73%.
That was made up of the following mutual funds:
-USA Large Cap +23.48%
-USA Small Cap +27.12%
-JAPAN Large Cap +23.69%
-JAPAN Small Cap +16.86%
-International Developed +23.59%
-International Emerging +27.7%
As you can see, it was a good year.
I am sure many people had a better return, but 23.73% is great!
It does not mean that this mix will return this each year, but on average you can expect 12% based on historical data.
You can use my mix of mutual funds if like, or whatever you decide for yourself.
The main thing is that you understand what you are investing into.
If you would like something simple many people just invest into the S&P500 index fund, which returns about the average.
As you can see in my example above, the USA large cap returned almost exactly my average of all 6 funds.
I could have saved my effort of splitting my investing into 6 funsd and just put it all into one fund.
I will keep diversifying however as i want a mix across the world which brings less risk but solid returns.
Do some research before diving into to investing your hard earned savings.
Some key things to look at:
-What is the mission of this mutual fund?
-What index is it following or trying to beat?
-What have been the annual returns over the last 5-10 years?
-Is there any commissions to pay when you invest or is it a “no load” fund.