Basic Investing Principles

Keep Fees Low
Fees and expenses reduce your returns over time. That goes for all types of financial products, including mutual funds, individual stocks and bonds, insurance and mortgages.

When it comes to mutual funds, it's important to know the difference between "load" and "no-load" funds. Load funds charge an up-front sales fee whenever you make an investment. No-load funds do not charge an up-front sales fee. If you are evaluating mutual funds, look for no-load funds with expense ratios of less than 1 percent.

Similarly, when it comes to trading individual stocks or bonds, you want to keep costs low. Stock brokers charge a commission every time you trade. If you are interested in purchasing individual stocks and bonds, consider using a discount brokerage firm and completing your trades online when possible to keep your trading costs low.

Index Funds
Index funds are low-cost mutual funds that seek to mirror the performance of the broader markets they represent. Years of investment research show that mutual fund managers who try to buy and sell individual companies based on their own research have a hard time outperforming the broader markets over time. That's why index funds are so attractive.

Diversify to Reduce Risk
The old saying about "not putting all of your eggs in one basket" is especially true when it comes to investing. Diversification means spreading your investments among different asset classes, such as stocks, bonds and cash equivalents. It also means having exposure to a large number of different companies so that your investment success isn't dependent on a single company or sector of the market.

None of us can tell with certainty which investments will rise in price, but if your investments are diversified enough, you increase your chances of owning investments that rise in value. Just as important, however, diversifying your portfolio helps lessen the impact of investments that lose value. In short, diversification is a way to help reduce risk in your overall portfolio and improve your returns over time.

Mutual funds can be a convenient and effective way to achieve instant diversification through a single investment. Be careful though. Some people invest in several mutual funds that all have similar stocks in them. They think they're diversifying across several mutual funds, but instead they're duplicating efforts.

Rebalance to Stay on Track
Once we have made our investment decisions, we often forget to revisit them. But markets change. Rebalancing helps you maintain your target asset allocation among stocks, bonds and cash. If the value of the stocks in your portfolio increases, the ratio of stocks to bonds could change. Over time, you could end up with more risk than you realize. Rebalancing refers to adjusting your assets periodically to meet your target allocation of stocks, bonds and cash.

Keep it Simple
There are over 10,000 mutual funds in the United States. So which ones are right for you? How do you find out? And how can you be confident that you've made the right decisions?
Having too many choices can be overwhelming, making it difficult to manage risk, ensure proper diversification and be confident that all of your investments are working toward a common goal. Tracking the progress of many investments takes time, not to mention the paperwork.
Owning a few simple, well-chosen investments is a sound approach for many investors. For example, the average investor today doesn't need complicated investments, such as futures, options and hedge funds. If you don't understand an investment, then don't buy it.