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Finding good mutual funds starts with finding good mutual funds companies (families) and some families are friendlier to average investors than others. They offer good investments to folks who simply aren’t sure where to invest money. People get confused by all the sales rhetoric, so here we simplify where to invest with the companies that are investor friendly.I started following (and selling) this stuff in 1972 as a stock broker, trying to get a handle on where to invest other people’s money… trying to pick only good investments for those who trusted me. Once I learned that funds were the answer to what 90% of people needed, the question became: how do I find good mutual funds? I am writing this in 2014 as a retired financial planner, and would like to share something I’ve learned over the years, so hold your breath.Your idea of what good investments or good mutual funds are might differ from the ideas a sales rep might have, especially if that person makes money from commissions and other fees. Breathe easy. A financial planner who works for commissions can tell you where to invest and can sell you good mutual funds. The problem is that he or she can’t tell you where to invest in the investor friendly companies… and make a living doing it.A $20,000 investment in a stock fund could cost you $1000 upfront, $400 a year for expenses, and another $300 a year for additional fees if you invest through a planner. Or, it could cost you a total of $200 a year or less if you invest directly with a major investor- friendly NO-LOAD company.Truly good mutual funds companies keep investor costs low. They are financially strong; and offer a broad selection of investments with good performance records. Good service is provided at no cost. Enter “no load funds” into a search engine to find them. Names like Vanguard, Fidelity and T Rowe Price will appear. They all offer average investors good investments at low cost. All three of the above meet our qualifications – and the first two are the largest companies in the business.Good mutual funds are not expensive, and you do not get what you pay for when you pay for high charges and fees. In fact, these extra costs drain money from your account and work against you. The net result is a lower return on investment. I don’t call that investor friendly. When there’s a high cost if investing, that’s not where to invest your money.Now, once you’ve opened an account with one of the friendly companies you could be facing a list of more than 100 choices to choose from. Now the question of where to invest gets more specific. How do you find good mutual funds to invest in? The general categories are stock (equity), bond, money market, and balanced funds (the latter being a combination of the other three). What you need to understand is that even good mutual funds in the stock category might lose money in 2014 and/or 2015. If the stock market falls, these funds in general will not be good investments. Also, if interest rates climb, bond funds will not be good investments. More than anything else, the markets determine whether or not investors make or lose money. On the other hand, good mutual funds tend to outperform the rest over the long term.With today’s record low interest rates money market funds don’t look like good investments because they pay almost nothing in interest. But, that’s where to invest money you want to keep safe. If rates go up, money market rates will follow. Balanced funds will be losers if stocks and/or bonds take a big hit. Don’t get depressed. Invest in 2014 and 2015 with your eyes open.Going into the year 2014, stock funds were very good investments for five years straight; and bonds funds were good mutual funds to invest in for over 30 years. In 2014 and beyond things could get rough. Focus on strategy more than picking good investments in each fund category. Have some cash in a money market fund awaiting future opportunities when the dust settles. Spread your money across all four fund categories, because no one really knows where to invest in times of uncertainty.As 2014 and 2015 unfold, remember that both stocks and bonds have their up and downs. Over the long term, funds have been good investments for tens of millions of people through good times and bad. Keep in mind that good mutual funds come from good mutual funds companies… and that’s where to invest your money.

Before one decides that they want to invest they need to make a few sub-decisions. Firstly one must know the purpose why they are investing, where they will invest, how they will invest and when they will invest. If these elements are not outlined clearly then there may be losses that occur because of this indecision.THE WHY QUESTIONDealing with the why question involves looking to the future. This is the intent and purpose why you are delaying consumption. Many people have different reasons why they go into different investment vehicles. As an investor you need to decide what tenure is best for you. I personally classify investment horizons into three; short, medium and long term. The short-term is for those investors who want a quick maturity of their investments that ranges from days to a year. Medium-term would be anything from 1 year to 5 years. Long-term would be anything above 5 years.For example is someone is trading on news or merely speculating on price movements, they would go long or short for a limited time horizon. In this type of investment technical analysis is used to study the trends and candlesticks of an underlying investment such as currency pairs in foreign exchange arbitrage. Transactions of this kind can hardly be called investing. I would call them speculating since they do not take into account any meaningful fundamentals and hence the odds of making a profit become no different than tossing a coin. However if someone is saving for a wedding it would be critical to have an investment vehicle that is liquid and preserves the initial capital or principal such as fixed income securities or treasury bills (TBs). Such a person would be looking at a medium-term horizon depending on when he intends to liquidate and have the wedding. However if a 25 year old starts saving for retirement they have more time to hold investments until their prices align with their true values (in the case of value investors). Such a person could go long in stocks and hold them. In this instance, fluctuation of the stock is not as important since liquidation of the investment is deferred.It is vital for anyone to decide why they are investing as this will give an acceptable time horizon bench-mark and more importantly determine the risk level acceptable to their portfolio.THE WHERE QUESTIONOnce one is clear why they are investing, it will not be hard to establish where they must invest. If you are simply speculating then there is need to take cover in the hedging system. This is because your positions are just guesses that may turn out wrong. This was coined in the saying “downside risk and upside potential”. So if you have bought long a mining stock that you anticipate going up, you may want to protect yourself by going to the derivatives market and buy a put on the same stock. A put is a right but not an obligation to sell an underlying security at a predetermined strike price in the future. So if the security price goes down the holder of the put may still sell at a higher price than the ruling market value of the underlying security (mining stock). These complex transactions are normally done by active traders in search of alpha. I would not recommend a novice trader to be dealing the derivatives market as even the most experienced fund managers and business remodeling gurus like Andrew Fastow shipwrecked because of them.The novice investor can participate in two broad markets; the money and capital markets. The rule to success is keeping it simple. The money market serves those who are in the short-term investment horizon and the capital market serves those who are in the medium to long-term investment horizon. These two markets can be very crucial in making sure that your portfolio is well diversified and balanced. The money market gives a choice of investments such as TBs, negotiable certificates of deposit (NCDs), and other short-term debt instruments. Such instruments stabilize the value of a portfolio since they are not as volatile as stocks. The mix between stocks and debt instruments in a portfolio should be according to an investors risk profile. For the risk-averse investor, a portfolio could have 60%-80% debt instruments (with triple A ratings) and 20%-40% stocks (blue chips). For the more risk-loving investor a portfolio could have the above weighting but however inverted between stocks and debt instruments.You can choose to divide the debt into time horizons as well but however remember that there is price volatility on long-term bonds caused by interest rate fluctuations. Stocks can be sub-divided into small, medium and large cap; value, growth, dividend and so on. If you are after higher return you could look at investing in emerging markets like India. The stock exchanges in India are among the top paying exchanges in the world in terms of yearly market return. It may be a mammoth task to invest in these exchanges on your own. You can easily do this through world funds like the Templeton India Growth Fund and many others. However to be able to harvest the maximum returns from these funds you need to hold your investment for more than five years. This is because you may end up being hurt by transaction costs and capital gains tax.HOW AND WHEN QUESTIONMutual funds are a good way to get started if you are a novice investor. It is not advisable to search for a fund using the highest returns from a single period. A fund has got to consistently return above market to qualify to be enlisted on your potentials. Also evaluate how they invest and their risk tolerance before you take the leap. Once you have invested do not jump from fund to fund as this will hurt your returns. Better still you may choose index funds that emulate a certain sector of the market or a whole market as John Bogle demonstrated with the Vanguard 500 Index Fund. The lack of active management generally gives the advantage of lower fees (which would otherwise reduce an investor’s return) and in taxable accounts, lower tax.If an investor has the basics to begin investing on their own, I would suggest a concentrated portfolio. This portfolio is made up of a small number of stocks (advisably below ten) that you select and invest in. At best a concentrated portfolio must have stocks from sectors that can achieve negatively correlated returns. However if one carries out a thorough fundamental analysis and constantly reviews the portfolio to check for divergences there will be no need to structure a portfolio using the academic approach mentioned above.Fundamental AnalysisWhen conducting fundamental analysis, an investor wants to be sure that they are buying a healthy business. Stock prices in the long run eventually align with the financial health of the underlying stock. The stock market punishes the weaklings and rewards the strong. Hence in doing your fundamental analysis you can look at the following aspects:1. Market share trends – when the market share of a business is decreasing it is a clear sign that it is heading for the doldrums. Business can be operating in decreasing, static or growing markets. You will be better off if you buy a company that is increasing its market share in either a static or growing market. An investor can use the Porter’s Five Forces to analyze an industry and the market trends existing therein.Management – the ultimate test of management is their frugality. In the words of Peter Lynch, if you invest in a company with gold plated toilet seats at its headquarters you have most likely contributed towards their purchase. Salaries paid to managers and the consistency of business strategy can also indicate the suitability of management. If you see management with such inconsistent strategies like raising equity financing and paying out dividends at the same time you should be suspicious. Managers must be open, have integrity and be honest. This is the criteria that the famous investor Warren Buffet uses.2. Return on Equity (ROE) – this is by far the most important indicator of the financial health of a business. This indicator shows the return as a percentage of the equity or shareholders’ worth. It is specifically an investor ratio. Look at the ratio starting 10 year back to the present time. Look at how the trend is progressing. Make sure the accounting policies are consistent over the same period to avoid concealment of salient problems. You should invest in companies with a high and/or increasing ROE ratio. This also shows that the management is careful to incessantly increase shareholder value.3. Price-Earnings Ratio (P/E) – this ratio equates the price of a share to the earnings it made over a period of 6 months or a year. It can also be a forward P/E when it measures using forecast earnings. This ratio is great if you are a value investor. You have heard the gurus say “always buy low and sell high to make the most returns”. But how do you determine whether a stock is cheap? You use the P/E ratio. However you must be careful to research why a stock has a low or high P/E ratio. According to the Efficient Markets Hypothesis all the information of a stock is reflected in its price. So if a stock has a low P/E ratio, it might be because it has very little prospects. On the other hand if a stock has a high P/E it may mean that the market has factored in its future growth. To measure this aspect analysts take to the PEG ratio that expresses the P/E over the future growth anticipated for that stock. However there are some stocks that tend to go under the market radar and it will take a lot of work to identify them.4. Dividend paying stocks – these companies give back money to the shareholder in the form of dividends. Buy stocks in companies that pay dividends or buy back their own stock. Any company that does not have suitable merger or acquisition targets must give back money to the shareholders. A lot of companies lose money by trying to go into new industries in which they are ill experienced. This is why a company which buys back its own shares is a good company to invest in. By buying back shares, a company is actually reducing the supply of those shares on the market. From your Economics 101 course you probably know that when demand is more than supply the price goes up. So when the price of the shares goes up the investor has been rewarded by capital gains. On the other hand when dividends are paid the investor has been rewarded by income.5. Debt – invest in companies that are debt-free or have low gearing. Gearing is the ratio of debt to equity. When a company is leveraged its returns will have more risk as measured by standard deviation. Also in bad times a leveraged company suffers more than a debt-free one. Debt covenants can be very stringent demanding a company to disclose whenever they enter into any riskier projects. Other lenders will recall the bonds placing the company at the risk of bankruptcy. Cash rich companies are better and less risky than debt-ridden ones. They can easily weather a financial storm than those companies in debt and cash-strapped.A passionate and savvy investor will always have a watch list. Certain stocks, however attractive, do not have the right prices. When the market dips and prices fall it would be the right time to buy them. For maximum gains invest in depressions or recessions. Wait for corrections in the market and then buy and hold. There are no formulae for knowing the rock-bottom of a bear market. Follow your gut! On the other hand you can always be buying stocks in a monthly programme known as dollar cost averaging. In this approach you select stocks based on the principles outlined above and you invest infinitely into the future and thereby averaging the price at which you buy the stock.

Every one makes investment mistakes. From the time we were born, we learned from the mistakes we made. As investors, we need to learn from our investment mistakes by recognizing when we make them and make the appropriate adjustments to our investing discipline. When we make a losing investment, do we recognize our investing mistake and learn from it, or do we attribute it to some outside factor, like bad luck or the market? To make money from your investments and beat the market, we must recognize our investing mistakes and then learn from them. Unfortunately, learning from these investing mistakes is much harder than it seems.Some of you may have heard of this experiment. It is an example of a failure to learn from investing mistakes during a simple game devised by Antoine Bechara. Each player received $20. They had to make a decision on each round of the game: invest $1 or not invest. If the decision was not to invest, the task advanced to the next round. If the decision was to invest, players would hand over one dollar to the experimenter. The experimenter would then toss a coin in view of the players. If the outcome was heads, the player lost the dollar. If the outcome landed tails up then $2.50 was added to the player’s account. The task would then move to the next round. Overall, 20 rounds were played.In this study there was no evidence of learning as the game went on. As the game progressed, the number of players who elected to play another round fell to just over 50%. If players learned over time, they would have realized that it was optimal to invest in all rounds. However, as the game went on, fewer and fewer players made decisions to invest. They were actually becoming worse with each round. When they lost, they assumed they made an investing mistake and decided to not play the next time.So how do we learn from our investing mistakes? What techniques can we use to overcome our “bad” behavior and become better investors? The major reason we don’t learn from our mistakes (or the mistakes of others) is that we simply don’t recognize them as such. We have a gamut of mental devices set up to protect us from the terrible truth that we regularly make mistakes. We also become afraid to invest, when we have a losing experience, as in the experiment above. Let’s look at several of the investing mistake behaviors we need to overcome.I Knew ThatHindsight is a wonderful thing. As a Monday morning quarterback, we can always say we would have made the right decision. Looking again at the experiment mentioned above, it is easy to say, “I knew that, so I would have invested on each flip of the dice”. So why didn’t everyone do just that? In my opinion, they let their emotions rule over logical decision-making. Maybe their last several trades were losers, so they decided it was an investing mistake and they become afraid to experience another losing trade.The advantage of hindsight is we can employ logic as we evaluate the decision we should have made. This allows us to avoid the emotion that gets in our way. Emotion is one of the most common investing mistake and it is the worst enemy of any good investor. To help overcome this emotion, I recommend that every investor write down the reason you are making the decision to invest. Documenting the logic used to make an investment decision goes a long way to remove the emotion that leads to investment mistakes. To me the idea is to get into the position where you can say “I know that” rather than I knew that. By removing the emotion from your decision, you are using the logic you typically use in hindsight to your advantage.Self CongratulationsWhenever we make a winning investment, we congratulate ourselves for making such a good decision based on our investing prowess. However, if the investment goes bad, then we often blame it on bad luck. According to psychologists, this is a natural mechanism that we, as humans possess. As investors, it is a bad trait to have as it leads to additional investing mistakes.To combat this unfortunate human trait, I have found that I must document each of my trades, especially the reason I am making the decision. I can then assess my decisions based on the outcome. Was I right for the right reason? If so, then I can claim some skill, it could still be luck, but at least I can claim skill. Was I right for some spurious reason? In which case I will keep the result because it makes me a profit, but I shouldn’t fool myself into thinking that I really knew what I was doing. I need to analyze what I missed.Was I wrong for the wrong reason? I made an investing mistake, I need to learn from it, or was I wrong for the right reason? After all, bad luck does occur. Only by analyzing my investment decisions and the reasons for those decisions, can I hope to learn from my investing mistakes. This is an important step toward building genuine investment skill.Luck Becomes InsightThe market is comprised of a series of cause and effect actions, which are not always transparent. This cause and effect has created some interesting behaviors by some very successful people. For example, some baseball pitchers are known to not step on the white chalk line when they are playing. I am sure you have heard of many “superstitions” that people hold to be true to help them perform well.In an experiment by Koichi Ono’s in 1987, subjects were asked to earn points in response to a signal light. They could pull three levers, though they were not told to do anything in particular. They could see their score on a counter, but did not know that points were awarded completely independent of what they did. Nothing they did influenced the outcome in terms of points awarded. During the experiment, they observed some odd behavior as the participants tried to make the most points possible. Most subjects developed superstitious behavior, mainly in patterns of lever pulling, but in some cases, they performed elaborate or even strenuous actions. Each of these superstitions began with a coincidence. In some cases, the participants would pull levers in a particular sequence. In other cases, even more odd behavior was observed, including a person who jumped off a table and then later jumped up to touch the ceiling to “score” points. Keep in mind the points were awarded either on a fixed time schedule or on a variable time schedule, not based on the action of the participant.The point of this is that as humans we tend to think that luck is insight. We fail to analyze effectively the situation and the real reason for our success or failure. In investing this behavior will lead to ruin. To help overcome our natural tendency, we must document our investing decisions and then assess the results. This assessment process helps us learn from our success and from our failures and is critical for each of us if we hope to become successful investors.Learn from Investment MistakesTo help avoid investing mistakes, what should you document before you make an trade? I like to look at three categories regarding a stock I am considering. First, I look at a series of fundamental information such as earnings yield, return on capital, revenue growth, insider holdings, sector, and free cash flow. The fundamental information helps me identify if this is a good company with growing earnings, good management and has potential. After reviewing the appropriate financial information including SEC documents, I identify the risks inherent in the company. These risks might include competition, market share, insider transactions, and any litigation that the company is experiencing. Here one needs to try to identify every possible risk and assess them critically. Finally, I look at the chart of the stock, seeking to identify support and resistance zones. This gives me potential entry points, exit targets, and the trailing stop loss. I complete these sections with a written trading strategy describing how I expect to make my trades. All these investment factors should be documented before making a trade. Once the trade is complete, I review them to see what I can learn so I can avoid any investing mistakes in the future.To learn from our investing mistakes, we need to document our actions before we make the decision. We also need to be honest with ourselves when assessing our results. As we have seen, it is quite easy for each of us to put on rose-colored glasses and think we are better investors than we really are. We need to assess critically our investing abilities without distorting the feedback we receive from our decisions. Those of us who are able to learn this valuable skill will benefit greatly. Those of us who are unable to apply this learning will be destined to mediocrity at best and likely lose much of their capital before they quite investing.