Tips for the Cautious Investor

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For skeptical investors who have trouble trusting an agent with their hard-earned money, mutual funds are often the best bet.

Suppose a skeptical investor wants proof that an adviser obtains good net results for his clients. An adviser's normal answer is that his reputation shows he is competent, that a client should select an adviser and then trust him, the same, as he would do with a physician or a surgeon.

A better solution for a cautious investor is to buy shares in one or more mutual funds. To be sure, this requires some study, but the sensible selection of a mutual fund is a simple matter compared to trying to choose among all the number and variety of corporate stock available. The job is further simplified if an investor can locate a dealer specializing in mutual funds.

For a nervous skeptic, a major advantage of a mutual fund is that it publishes tables showing exactly what net results have been obtained by people who bought its shares on certain dates in the past. Of course, the future is not guaranteed, but a fund's past performance record furnishes a solid starting point.

In choosing among mutual funds, a temperamental buyer might pay extra attention to the following points:

(1) Diversification. The advantage of diversification is that results cannot be much hurt by a bad performance on the part of a few of the stocks owned. Most mutual funds spread their assets among at least 50 companies and a dozen industries, more than is practical for an investor acting independently, unless he is wealthy. A man who wants to go the limit on diversification can find funds with hundreds of items in their portfolios, spread among bonds and preferred stocks as well as common stocks of companies in 25 industries.

With broad diversification, a fund's past performance is a better guide to the future; because the fund has always owned a good many stocks, a good performance record cannot be the result of a lucky choice of just a few stocks.

(2) Volatility. Judging by the record to date, the market price of common stock will rise and fall, and a nervous investor might as well get set for this. Diversification helps, but it by no means eliminates price fluctuation.

The fact that a certain fund has a fine long-term average performance record is of no help to an owner who sells out on a temporary dip in price. Some funds are several times as volatile as others. When the general stock-market level goes down, as it did in 1957 and again in 1962, the price per share of a volatile mutual fund drops faster and farther than that of a more stable fund.

A "balanced" mutual fund divides its assets among bonds or preferred stocks, or both, as well as common stocks. Naturally its market value per share fluctuates less than that of a fund wholly invested in common stocks. Also, the type of common stocks owned by a fund affects its volatility. So if a man gets panicky when the price of his stock drops, he had better look for a balanced fund whose record shows a comparatively stable price.

Skeptical investors often come out on top above their more adventurous counterparts, but they also stand to make much smaller profits. As always, diversifying your portfolio with a number of mutual funds in addition to corporate stock is the best idea for a long-term investment that will carry you through retirement.

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