As many people have seen, relying on emotions to guide investment choices rarely, if ever, works. By the time emotions kick in, the damage has already been done. On the other hand, using logic and mathematical formulas to invest takes a considerable amount of time. For most people they do not want to worry about learning how to do the analysis. So rather than rely on emotions, or rely on math, most people rely on the mutual fund company to do the practical investing work for them. They pay a small percentage of their investments in annual fees, and focus their energies on earning more and investing more.
The first step to practical investing is to find a good mutual fund company. There are many companies out there, and they all take different investment approaches. Just like with any profession there are some who do their job better than others. While it may be tempting to choose the one with the highest fee (thinking that you get what you pay for), this is often furthest from the truth. Instead, researching the funds, using a third party site like Morningstar.com or the FINRA fund analyzer can bring the investor to a decision. Then the investor can build the portfolio with funds that fit his or her risk tolerance, and start to dollar cost average into them.
Choosing good mutual funds can be quite the chore as well. These companies, after all, are in it for the profit and they need to charge something to keep their business open. Some of them will end up charging too much in expense ratios, and the investor will be hurt by losing some of their return. Don’t waste your money on an actively managed fund. Buy mutual funds with low expense ratios that track the major stock and bond indices. Within the world of passively managed fund, look for investments that fit your style, risk preferences and investment time horizons.
The biggest thing for those who are not financial professionals is to not waste too much time on something at which they are not an expert. Don’t spend your time and energy trying to learn how to analyze stocks. Practical investing allows you to devote that time and energy to earning more money. By finding a trusted advisor to pick the funds, and letting the fund company do the analysis, the investor can take the stress and worry right out of investing. They can develop a plan, one that includes regular rebalancing, dollar cost averaging, and at least an annual review, and be comfortable knowing their money is now working for them.