The Confident Investor

It is important to review your investment choices on a regular basis. If you invest in mutual funds, you should review them each February. I suggest February because you will receive your end-of-year statements by February so that you can pay taxes. You should look at these long-term investments and decide if it still fits your strategy and that your mix of investments is correct. If you want some advice on how to balance your portfolio, check out this article that I wrote. As always, I strongly suggest you confine your mutual funds to index funds rather than actively managed funds.

For stocks, the review needs to be a bit more frequent. You need to get out of stocks that no longer perform to your satisfaction. If you are not sure how to evaluate the growth rate and performance of your stocks, please consider reading my book, “The Confident Investor” as it will help you analyze companies to find the Good ones.

For the next several weeks, I will be doing a daily review of the companies on my Watch List. I will take off those companies that are no longer performing to my satisfaction. As a point of disclaimer, as quickly as possible after taking the stock off of my Watch List, I will also be selling any holding that I have in any of those poorly performing companies. If you would like to make sure you get these updates:

• You can subscribe to my weekly newsletter digest of this site.
• You can follow me on Twitter @ConfidentInvest.
• You can subscribe to my RSS feed.

I regularly enjoy watching Jim Cramer of Mad Money on CNBC. One of the things that I most enjoy about him is that occasionally he admits when he is wrong. While I am not saying that I was wrong to put a company on my Watch List and then eventually take it off, I am saying that the base fundamentals of the company have changed. I am firing that company from my portfolio (I guess that makes me a little like another famous investor, Donald Trump).

A few days ago, I described the basics of mutual funds. In this article, I will cover the basic types of different mutual funds and how the value of a mutual fund “share” is calculated.

You can buy a mutual fund’s shares in a few different ways. Funds are often described as either “no-load” or “load” funds. The designation depends on whether or not the fund charges a sales commission.

• Many funds are no-load funds that charge no (or a very low) sales fee or commission. No-load funds are typically sold directly to investors with ads in newspapers, magazines, and the Internet. In this case, you complete all the paperwork yourself.
• Load funds charge a sales fee or commission for purchases. Some funds charge the fee when you buy shares; others charge when you sell them. Brokerage firms and banks often sell load funds.

You may wish to invest in mutual funds, in addition to individual companies. There are reputable funds in both categories. Because sales charges reduce your return, I recommend that investors purchase no-load funds over load funds whenever possible.

The value of a mutual fund share is calculated on the basis of the value of the assets owned by the fund at the end of every trading day. A share’s value is called the Net Asset Value (NAV). The fund calculates the NAV by adding up the total value of all of the securities it owns, subtracting the expenses of the fund, and then dividing by the number of outstanding fund shares.

Since the value of stocks and bonds owned by the fund changes daily, the fund’s value will also change daily. Therefore, a mutual fund adjusts its price once every trading day to provide investors with the most current NAV. This is different from the price of stocks because:

• The NAV updates only once at the end of the day as opposed to every second of the day with stocks.
• The NAV is not directly tied to the whims and moods of the market. However, since the price of a mutual fund is determined by the sum of the value of all of its components, the various market moves (however logical or illogical) of stocks, bonds, and cash that the fund owns are ultimately reflected in the NAV.

While you cannot buy a fraction of a share of a company, you can have a fraction of a mutual fund share. This happens when the amount you invest does not divide evenly by the NAV. If you send the mutual fund company a check, the managers will divide that investment by the current NAV. This results in your number of shares in the fund, even if it is a fraction. This breaks the “share” concept and demonstrates that you are simply pooling your money into a large pool.