I am really sick and tired of hearing these BS artists on television telling their callers not to sell their mutual funds or stocks because they will “lock in their losses”. The last time I heard this it was from – who else – Carmen Wang Ulrich. This is probably the most stupid scare tactic ever invented to prevent people who don’t want to learn how to invest from taking action. How stupid is that?

Here’s why it’s ridiculous to even listen to this dangerous myth:

- What if your stock goes to zero? Or the company goes bankrupt? At what point exactly should you sell? For a mutual fund, how low does it have to go before you throw in the towel?

- What if while you watch your investment lose money, you see that there are others out there that are making money? Do you not sell to avoid “locking in a loss”? You are guaranteed a loss if you don’t switch to something that’s making money!

- What if we have another market dive? What if we have zero growth for ten years – just as today’s market has wiped out all of the increases of the past ten? When do you sell in favor of something else? Like a CD?

OK let’s do the math. Investor A and Investor B each have $10,000 in a mutual fund that’s down 30% so they each now only have $7,000. All indications are that the market is still headed down. Or at least, that’s the investors’ fear.

Investor A listens to Carmen and sits there watching it lose another 20% because Investor A believed without knowing why that you shouldn’t “lock in” your loss by selling. Except that now Investor A has $5,600 in her account. (By the way: If you listened to Carmen last October, this is EXACTLY where you would be right now.) She sits there and watches her $5,000 bounce around the bottom of the market, because this is a market like nothing the tee vee people have ever seen before, and they don’t know what to do either. Eventually, the market moves up 10% after six months, but that puts her at only $5,500. She’s a long way off from gaining back her losses.

Investor B instead uses common sense, and doesn’t listen to tee vee “experts”, and sells when her account is down the first 30%, moving her $7,000 to a Ginne Mae (government) bond fund (not actual performance, only an example), earning 5% over the next 6 months, so she now has a $350 gain instead of a $1,400 loss, for a total of $7,350. She now moves $4,000 of that back into mutual funds that she feels confident are now moving up again. Investor B gets the same 10% market move that Investor A got, so she has $4,400 from her move back into mutal funds. And since she’s made 5% on the remaining $4,350 her totals are $4,400 + $4,565 for a total of $8,965 in her account, well ahead of Investor A. (She will now also keep watch on the market and know when to sell and when to buy!)

OK which person do you want to be?

No matter that the market is doing today, you DO NOT LOSE BY SELLING. This fear of selling is the one characteristic that will definitely make you a loser in the markets every time. You must understand that you will win some, you lose some, when you are smart about investing, you take your losses before they get too big, and move the money to where it will be working for you again. There is no such thing as “buy and hold for the long term”. Those days are gone. Learn what to do now, or stay away from the markets.

Before the economic crisis, plenty of people invested in index mutual funds as a way to diversify and ride the market without knowing too much about investing.  Whether you continue to invest in index mutual funds depends on what you think the future will hold.   Do you believe that the world economy will grow? Do you believe that US economy will grow?  Today we aren’t so sure. When you look at a major stock index, you are seeing an indicator of what investors think will happen to economic growth. Used to be, a whole year ago, you could make good money buying index funds. Today? Not so much.  Still: if you are in for the long term, are index funds for you?

It’s important to learn how do  mutual funds work, if you’re not clear on the specifics. Long term (and we don’t know exactly what that means), stocks are likely to go up. Eventually. But at what rate? How long will it take? Is this downturn “different” than the last time? It all makes things very difficult for the investor that use to spend ten minutes a month sending money to their index fund in their 401(K). Yet with all the many indexes around the world, there may be some opportunities there.

For index mutual funds, the fund share price will change according to the index performance. For example, thousands of mutual funds use the S&P 500 as the base of their portfolio. But the S&P is heavily weighted with financials, so there has been a real loss for investors who chose that index fund. you’ll also find there are many differences between  funds for operating expenses and “load” fees.  Fees and commissions can compound a loss in share price.

When you’re looking at index funds, you may also consider looking at Exchange Traded Funds, or ETFs. These are really just baskets of stocks, and don’t require the same active management as do mutual funds, even index mutual funds. You can choose ETFs that include the best of certain stocks or industries, but leave out the financial companies or other industries you want to avoid. You will also find lower fees for ETFs vs. most index funds. For the long term investor who wants to put certain amounts in each month, you want to stick with low fees. but today, even with index mutual funds, you don’t want to think that you can simply choose the best mutual fund, send your money, and in ten years you’ll be rich. For example, as of today, all gains for the past ten years were wiped out with the rcent market downturn. So again, what is the “long term” time horizon you are comfortable with?

The best strategy for investing in index mutual funds is one where you review regularly, move your funds according to market conditions, and don’t expect it to be like the old days a whole 10 months ago – you will have to be more actively aware of what your money is doing to avoid losses.

To an extent, diversification of your portfolio can help, if you add bond funds, emerging markets and other different types of indexes to your mix. In this crazy market, be sure you are knowledgable about what stocks you ar invested in, even if you’re investing in an index fund. That’s the best way to avoid big losses in your index mutual fund, and enjoy long term gains.

Mutual funds have been very popular, but do investors really know how do mutual funds work?  Even in hard economic times, mutual funds are still one of the most popular investments on the market today, mainly as a result of retirement funds. For example, there are more than 10,000 different mutual funds available on the market to choose from.

There are many reasons for their popularity, but it could be due to historically good returns, or that they are easy to buy and sell. With the billions flowing into 401(K) accounts, mutual funds also gain the lion’s share of such investment. They also offer a way to diversify and dilute risk.

Here’s how mutual funds work:  A mutual fund takes money from investors looking to invest in stocks, bonds, or a variety of other securities. It is basically a conglomeration of multiple individual investments. As this grouping of investments gains or loses value, investors will gain or lose also. When a mutual fund pays dividends, the investor receives his or her share. Mutual funds are professionally managed, and because of the variety of investments, can help investors be diversified. Investors have been led to believe for some time that mutual funds can do a large part of the investing work for an investor.

As for the business side, a mutual fund is a company that pools money from many investors and then invests the total on behalf of the group, in compliance with a specific set of investment goals. Mutual funds raise their money by selling shares of the fund to the public, in the same way that a company sells ownership shares of stock. It is this pool of funds that the fund company will use to make various investments, using vehicles such as stocks, bonds, and money market instruments.

When a shareholder purchases a share in a fund, they receive an equity position in the fund and, by extension, a share of each of the fund’s underlying securities. Usually, shareholders may sell any or all of their shares at any time, but as with other investments, the price of a share will change daily, based on the performance of the underlying securities in the fund.

When choosing a mutual fund, you should keep in mind your personal financial plan and goals. To start, don’t just rely on features such as past mutual fund performance - these do not reflect future performance in any way as many have learned the hard way today. Instead, start by determining your financial priorities, what financial resources you have, how you consider investment diversification, your feeling about how much risk to assume, and what your time horizon is for your investment goals.

If you only look at total returns you are seeing only half the story. Mutual fund returns show past performance, but even if the returns are high, are they competitive with the market for comparable investments? And will it necessarily reflect how a fund will do in a poor market if the returns have been gained only during up years? You should do your research into the underlying investments, fees, and performance before assuming a good total return means the fund is a quality investment. be sure to compare it to other similar funds over the same period. Using research, you can find what are the top mutual funds for your investment style and goals.

As it is often said, past performance can’t predict future results. After the recent downturn in the market, it’s clear that ever-rising values have hit the wall. It’s not certain either when or if the market will return to consistent growth. So, it is becoming all the more important to understand how mutual funds work, what the underlying investments are, and how they can fit into your long term investment plan given the current market conditions.

When your retirement money is invested in a really bad market, the first thing you want to do is think about reallocating. Reallocating means changing the portions of your money you have invested in each mutual fund. As you have seen, your 401(K) provider probably lists suggested allocations for your portfolio based on your age, and consists of what percentage your money should be in stocks, what percentage in bonds, and sometimes they tell you a percentage of your 401(K) to put in cash.

But these percentages go out the window in a recession or depression, because you want safety no matter when you are retiring. For the past year, stock prices have plunged. The allocations are probably wrong for your particular risk appetite. And if you call your 401(K) provider or employer, as I have, they will probably tell you, “Stay invested!” or “We feel the allocations are appropriate.”
Well, they really just don’t want you to move your money!

No, you have to learn how to reallocate your stocks on your own – based on a new market, and wait until things change or get better. There is no reason to stay in losing funds when you can reallocate to wait until a change for the better.

Now if you’re thinking of putting your 401(K) into cash, you should understand that that doesn’t not mean taking your money out of your retirement account. this could incur penalties that total a large percentage of your money – so don’t add penalties to your losses.

When you invest in your 401(K) instead put it into cash vehicles. Your broker will offer at least one or two of these accounts, since their plan allows for older workers nearing retirement to move into safer investments. These are the investments you want to take advantage of for now.

For example, if your broker offers a sample portfolio balance for someone within 3-4 years of retiring, use that for the their safest vehicles. some of these might be bond funds (usually government bonds), and some will be savings or money market options.

If you don’t want to take their advice, then see what funds or accounts they do offer, and move the portion of your money you want to protect into these vehicles. this is the way to move your 401(K) into cash, not by withdrawing all of your money. Then as the market slowly gets better, start moving small percentages back to stocks, based on the performance of the stock market. This is the beast way to use cash n your 401(K).

With the market crash from 2008-2009, one could ask, are hedge funds finished? The quick answer to the question is “hardly”. There is no general definition of what is a hedge fund. In the beginning, hedge funds would help “hedge” investments by selling short the stock market, and so providing protection against volatility in the stock market. But now, the term is used more broadly to describe any kind of private investment partnership.

Globally, there are thousands of different hedge funds operating. Their main goal is of course to make lots of money, and to do so by investing in a variety of different investments and investments strategies. Often the strategies used are more aggressive than than the investment strategies of standard mutual funds.

Generally, a hedge fund operates as a private investment fund. The fund’s general partner selects different investments and also manages the trading activity and everyday operations of the fund. The investors or limited partners will invest much of the money and share in the gains of the fund. The general manager often charges a small management fee and earns a large incentive-based bonus if the investments earn a high rate of return.

While this might sound like a mutual fund, there are some important differences between mutual funds and hedge funds:

1. Mutual funds are managed by mutual fund or investment companies and are quite heavily regulated by federal law. Hedge funds, since they are private funds, have (so far) fewer restrictions and regulations.

2. Mutual fund companies invest only their client’s money, but hedge funds can invest their client’s money as well as their own money in the underlying investments.

3. Hedge funds charge their clients a performance bonus, usually equal to 20% percent of the gains above a certain floor amount. This is in line with equity market returns. Some hedge funds have successfully generated annual rates returns of 50% or more, even during volatile or difficult market environments. A mutual fund return is usually not as high.

4. Mutual funds have disclosure requirements, as well as other prohibitions against investing in derivative products, such as using leverage, short selling, taking too large a position in one investment, or investing in commodities. Hedge funds however may invest client funds however they wish.

5. Hedge funds are restricted from soliciting investments, and this is why you hear very little about these funds. During the five years prior to September 2008, some of these funds have doubled, tripled, or even quadrupled in value or higher. However, it’s important to remmeber that hedge funds do incur large risks and in this difficult economy, many funds will likely disappear after losing big.

Hedge funds are just another way to protect wealth, but in a tough economic environment, it’s likely that some restrictions will be imposed in the future.