Teenager Asks: Do Mutual Funds Falter as the Market Rises?

I'm a senior in high school and have begun investing. I was told that when the stock market or the Dow does well, mutual funds do badly and vice versa. Could you please clarify this for me?

-- Johann Soto

Johann,

In your question, you seem to be confusing some aspects of the well-worn debate between actively managed mutual funds and index funds.

Last year, for example, the majority of actively managed funds did not beat the market. That is, their returns were not as good as those of the S&P 500, an index that reflects the performance of 500 well-known U.S. companies (the Dow Jones Industrial Average is similar index that tracks just 30 companies). Why pay for active management when you can buy a low-cost index fund that will track the performance of the market or a designated benchmark? That's the question you will hear from those who favor indexing.

But proponents of active management, in which a fund manager tries to pick stocks that will beat the market's return, argue that this approach will make a comeback when large-cap growth stocks aren't leading the market.

You can read about this debate in almost any financial publication. I wrote about it in February, and Brenda Buttner mentioned it in one of her reports from this week's Morningstar Investment Conference.

Instead of rehashing this debate, I thought I would point you to some sites that might be of interest if you are just starting to invest.

I commend you for your interest in investing. When I was a senior in high school, I was more concerned with losing the 20 pounds I gained during a midwinter stay in England. But getting started and learning about the various markets can be daunting at best.

A lot of the so-called educational materials you will find on the Internet are about retirement planning. And I doubt that, in your late teens, that's your first concern.

When I started covering finance several years ago, I needed a quick education. I started out by carefully reading The Wall Street Journal every day, front to back. This might be a good place to start. Pick a publication that you enjoy reading. Of course, I would suggest TheStreet.com, but any comprehensive financial magazine or newspaper will do. (Plenty are available on the Internet.)

I would go through the Journal every day and look up anything I didn't understand. With the Internet, you can easily find definitions for words and concepts. I like to use InvestorWords at www.investorwords.com, a free online investing glossary.

I also suggest that you take a look at this handful of sites:

Many mutual fund companies offer up the obligatory educational content, but Vanguard's site stands out. In the site's Learning Center, you will find its online university. This area offers a range of "online courses" that cover everything from stocks and bonds to building a portfolio.

For more on mutual funds, the Investment Company Institute, the mutual fund industry's trade organization, offers guides to understanding mutual funds and other instruments on its Web site. Just look under "Investor Awareness" on the ICI's home page.

The Mutual Fund Education Alliance, a trade association of the no-load mutual fund industry, also has a decent amount of education material on its site.

If reading all this written material sounds tiresome, maybe something like MainXchange is more to your liking. This site at www.mainXchange.com offers a free stock-market-simulation game for teens. When you sign up, you will get 100,000 virtual dollars to construct a portfolio of stocks, and you also will be able to use tracking tools and financial and company data provided by the MainXchange. And there are prizes involved -- a fine incentive.

I have never played this game, but it sounds like the perfect idea if you aren't quite ready to put your own money into the market.

I hope the above suggestions help. Maybe some of this information will be a little too basic for you. If that's the case, you are a lot further along than I was even at 25.

If any readers have suggestions for this young adult, please email me at [e-mail]. Send any questions or comments that you have as well, and please include your full name.

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