Are you looking for investing principles that don’t take a Harvard degree to follow?
Do you find yourself wondering how in the world to pick a mutual fund? Look no further! If you aren’t convinced that mutual funds are best, you can find a full explanation here. We have personally used the investing principles we’re about to show you for years and taught it to many people.
The 10-10-1 Rule
There are many, many metrics by which mutual funds are judged, and the shortest path to asylum is to try to understand them all. To keep it simple, there are three attributes of a mutual fund you should understand, and they are simple.
These are provided for guidance only, we make no guarantees!
How old is the mutual fund?
We only want to invest in mutual funds that have been around for at least 10 years. This is the first “10” in our list of investing principles. It is great that you are an ambitious investor that just started a mutual fund, but come back in 10 years and let me know how you are doing.
Over the past 10 years what has been the average return?
Look for at least 10%. This is a good point to pause and point out that you should only invest money in the stock market that you aren’t going to need for at least the next five years.
Why is this? Because there will be years where the market soars and years where it tanks. That is why I’m not necessarily interested in what the fund did last year or even over the past three years.
Have this mutual fund been able to make money over the past ten years? That is enough time to ride out the highs and lows of the market and at the end of the day, the fund manager should have been able to return at least 10 percent. Usually, a fund’s return is reported as 1, 3, 5, 10, and “Since Inception” percentages of return. When evaluating a fund my eyes go immediately to the 10-year column to see their performance.
Don’t pay more than 1% in expenses.
Companies that manage mutual funds do not do so for free. They earn a commission and rightfully so. It takes time and expertise to pick companies to include in the fund and then monitor their performance. The fee charged is called an Expense Ratio. For instance, if the fund charges a one percent expense ratio that means the fund will deduct one percent of your account’s balance annually for expenses.
To put real numbers on this let’s pretend you invested $10,000 into a fund that had a 1% expense ratio and in the first year, it gained 10%. This means at the end of the year your balance would be $11,000. The annual expense fee of $110 ($11,000 * 0.01) is then deducted leaving you with $10,890. I use this 1% number as an example because it is the “1” in the “10-10-1” rule for investing. When evaluating a mutual fund, I am willing to pay at the most 1% annual fee but no more. This is an important point as some mutual funds can charge well over 2%. They may have good returns, but this is too expensive. Remember, you pay that expense fee even in down years.
Finally, some mutual funds charge a “Load”. This is a fee that is charged to get into or out of the fund. There are plenty of funds out there with “No Load’ so don’t pick ones with this fee!
Investing Principles Made Easy: 10-10-1 (no load): That’s the gist of the 10-10-1 rule!
It’s short and sweet, but we hope these principles serve you well as you navigate your path toward making wise financial investments.
A word of of encouragement from our book Doing Money God’s Way: “At the end of the day, your hope is not in your investments…..You are simply a steward on the earth of what God has given. You prayerfully make investment choices and trust God.” If you’re enjoying the materials on this website you will find more practical insights and teaching in our book and workbook to help you live financially free!
