Issue date: 3/31/08 Section: Money/Health

How is it that my portfolio is currently beating the market's year-to-date by almost 20 percent in a down ("bear") market? In a word - diversification. Diversifying a portfolio spreads the risk by not putting all your eggs in one basket. However, most individuals starting out are not able to afford to purchase enough investment securities to spread out the risk. That is where a mutual fund becomes our next focus for investment.

When the majority of individuals set up a retirement plan, they are most commonly advised to invest in mutual funds. Mutual funds allow a group of investors to pool their money to purchase securities by a fund manager. Mutual funds spread the risk out into multiple securities and sectors.

You could take $100 and invest in one security and hope it does not go down. Or with a mutual fund you can take $1 and invest it in 100 securities that average a positive return, as some will go down and some will go up.

Mutual funds are professionally managed, often with the goal to perform better than the S&P 500 index. According to the Motley Fool Web site, during the 1990s, the S&P 500 provided an annualized return of 17.3 percent. Surprisingly, the majority of mutual funds do not even make the benchmark - that is, they don't do as well as the S&P 500.

The most obvious mutual fund to invest in would be a fund that mirrors the S&P 500, however even that fund would not be able to keep up. Why? One reason is fees. Somebody has to keep the lights on, and that person is you.

What kind of fees? The most common fee is called a load. There are no-load and load funds. The load fund charges a fee upfront when you purchase into the fund or later when you withdraw from the fund. No-load funds do not charge the client any fee to purchase. However, in addition to a load there are other fees, such as management fees and a fee called a 12b-1. Average fees are about 1.3 percent of your investment per year, although the fee for an index fund could average as low as about .19 percent.

Can you expect to earn a higher return on investment if you buy a fund that charges a load? There has been a long argument about paying a load and not paying a load. Load funds are not always better than no-load funds.

When choosing a fund, follow these simple ideas:
Step 1 - Choose what kind of investment fund you would like. International, domestic, technology, gold, healthcare, environmental, stock, bond, index, blend, conservative, aggressive, socially responsible and many others.

Step 2 - Choose a fund family. The management is the most important aspect of the performance of your fund. Some fund families have been around a long time. The oldest has been open since 1934 and some funds are very large which can absorb adverse market conditions better than others.

Step 3 - Read the prospectus. This is a little pamphlet that spells out what the fund can invest in, what fees it will charge and who comprises the management team. Thanks to Congress about ten years ago, this is all done now in plain English, as required by law.

What not to do - Do not chase the hottest trend. If a particular fund advertises that it is up over 50 percent, the chances that this will continue in the future are poor.

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