10

Details: Getting Started

USING MUTUAL FUNDS

Throughout this book, most discussion and examples have assumed you are using some type of mutual fund for your investment program. The last sections of Chapters 1-3 pointed out some basic reasons why this is recommended. This section reviews your options, and it suggests that you consider using fully diversified low-expense no-load funds to carry out your formula strategy economically and effectively.

The Fund versus Stock Choice

If you are going to invest in the stock market, you could do so directly by buying shares of individual stocks, or you could indirectly buy the market by investing in mutual funds. There are two main reasons why you should use the indirect approach in implementing your formula plan: to minimize transaction costs (return enhancement) and to facilitate diversification (risk reduction).

Depending on which mutual fund you are considering and your volume of investing, your expenses for a formula plan can be much lower with a mutual fund. When you accumulate shares over time, low volume can cause sizable expenses with individual stocks but hardly any problem with most mutual funds. Small share purchases through a broker literally cost a fortune in terms of percentage of the amount invested. Some stocks provide dividend reinvestment plans and optional stock purchase plans directly through the company,1 at no commision—perhaps one of the few routes for the individual investor to use low-cost DCA investing in individual ...

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