How To Pick A Mutual Fund In A Troubled Market
The strong start to 2012 has come to a halt in the wake of more trouble in Europe. For the early part of 2012, the United States turned a temporary blind eye to what was going on in the eurozone, but all of that changed as tensions heated up with Spain and, once again, Greece. This caused European markets to fall under more pressure and lead to the North American markets return to a state of hypersensitivity; every comment that comes from the eurozone seems to drive North American markets lower, causing investors to question their next move.
If professional investors cant figure out the eurozone, how is the part-time or amateur investor going to make any sense of the current state of the markets? What if youre picking funds for your 401(k), rebalancing, or picking mutual funds for your personal accounts? What should you do in these troubling markets?
SEE: Pick The Winners At The Mutual Fund Track!
Think Long Term
When picking funds for your retirement accounts, your investing timeline is likely long-term. With as much as 30 years before you take money from your retirement accounts, funds that may not be attractive right now could be priced at a bargain. Many international funds, especially those focused on the eurozone, are cheap right now and may be an attractive long term investment if youre particularly optimistic on the outcome.
Know What Youre Buying
Theres no doubt that the global financial markets are highly volatile right now, but for the investor, its important to more deeply evaluate the state of the global financial system. An ETF that tracks the performance of Spain has lost 40% of its value over the past 12 months, but iShares MSCI Philippines ETF, the ETF that tracks the Philippines, has seen a gain of nearly 20%. Before investing in an international mutual fund , look at how the funds assets are invested.
SEE: Finding Fortune In Foreign-Stock ETFs
Dont Buy and Sell
Long-term investors dont buy and sell funds, they reallocate. Reallocating is a change in the way your funds are divided into different areas of your portfolio. When the eurozone found itself under intense economic pressure, some investors moved a portion of their money away from holdings that included the eurozone and invested more heavily in domestic stocks . When they believe that the eurozone has stabilized and other portions of their portfolio have topped out, they may reallocate money back to their international funds and out of domestic funds.
For those with little investing knowledge, reallocation should be performed with the help of a financial advisor, but completely selling a fund is best reserved for when you lose confidence in the funds ability to produce the returns you expect.
Focus on What You Can Control
Even the best investors cant control what the markets will do in the future. They dont know what the worlds politicians will decide next and they dont know if Greece will eventually exit the eurozone. Maybe the largest mistake made by inexperienced investors is trying to predict the future.
A better strategy is to focus on what you can control. You can control how much in fees you pay, you can pick funds with relatively low turnover, keeping the expenses of the fund at a minimum, and you can maintain appropriate diversification within your portfolio. Everything else is nothing more than an educated guess and guessing rarely results in profits.
SEE: The Evolution Of ETFs
The Bottom Line
What will happen in Europe tomorrow? Nobody knows, but that doesnt mean that you should avoid international funds altogether. Many represent great values for long term investors, but the eurozone and other international markets wont remain under pressure forever. If you find an international fund that fits into your investing goals, consider taking Warren Buffetts advice and buy while others are scared.
