Determine your financial goals and risk tolerance.
When it comes to investing in mutual funds and ETFs, investors have thousands of choices. Before you invest in any mutual fund or ETF, you must decide whether the investment strategy and risks are a good fit for you. You should also consider more generally whether the unique style of investing of the mutual fund’s or ETF’s sponsor is a good fit for you. The first step to successful investing is to figure out your current financial goals and risk tolerance—either on your own or with the help of an investment professional.
Beware of mutual fund risk.
All investments carry some level of risk. An investor can lose some or all of the money he or she invests—the principal—because securities held by a fund go up and down in value. Dividend payments may also fluctuate as market conditions change. Mutual funds and ETFs have different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.
Consider the sponsor’s investing style.
Before you invest, you may want to research the sponsor of the mutual fund or ETF you are considering. The sponsor’s website is often an excellent place to begin, and it is helpful to spend some time browsing through the site to get a better understanding of the sponsor’s underlying philosophy on investing. Each sponsor has its own style of investing that will affect how it manages its mutual funds and ETFs. It is helpful to understand each sponsor’s style of investing, so you can better choose the right investment for you. My advice is to always buy index funds with very low costs.