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Mutual funds can be one of the best sources of passive income available. Once your choice is made, you need only monitor your investment occasionally and reinvest your profits into other instruments for proper diversification.

However, a mutual fund can lose money just like any other investment. Though mutual funds are managed by professional money managers, there is no guarantee of profit. In order to ensure your investment is a profitable one, you need do your research to make sure the mutual fund you chose will perform to your expectations. Here are some things to take into consideration when you’re choosing a mutual fund to make sure you’re purchasing the right fund for you:

Low Expense Ratio- Obviously you want your mutual fund of choice to have low expenses. I wouldn’t consider a mutual fund with an expense ratio over 1%.

Low Turnover- Turnover is how often a fund’s manager sells stock it owns and buys new stock. Every time stock is bought or sold, commissions are paid which raises operating costs and lowers your bottom line. Your mutual fund should turnover somewhere between 20% to 50% of its portfolio.

No Sales Fees- Unless a financial advisor is managing your whole portfolio (and doing a damn good job), sales fees are unnecessary. These are more commonly called “loads”.

Consider Your Risk Tolerance- How much volatility can you stomach? If you’re risk adverse, you’d better stay away from foreign funds and small-cap funds. However you’d better be willing to accept a lower return if you favor safer investments.

Consider Your Financial Goals- Do you need income or growth? Do you plan on retiring in 5 years or 25 years? The answers to these questions will have an immense impact on the mutual fund you choose. The more time you have until retirement, the more aggressive you can afford to be (within your risk tolerance of course).

Make Sure Your Fund Manager has a Good Track Record- A mutual fund’s historical returns can be meaningless. A fund may have returned 2% above the market for the past 15 years under Peter Lynch, but now Joe Blow is calling the shots. There’s a good chance that Mr. Blow isn’t as good as Mr. Lynch at managing a fund. Know your fund manager’s track record.

Full Investment- Your mutual fund should have cash reserves close to zero. You’re paying fees for your fund to invest your money, not act as a savings account.

Check Your Fund’s R-squared- An R-squared of 1 means the fund matched its benchmark index perfectly, in which case you’re better off in an index fund with lower operating fees. The closer the R-squared is to zero, the more the fund’s returns can be attributed to the fund manager’s investment savvy.

Don’t Choose on of Last Year’s Best Performing Funds- These funds tend to focus on a narrow sector that happened to do well in that year. These funds quite often have disappointing returns in following years when their sector cools off. Choose your funds based on your research, not how many stars it has or how many news anchors are talking about it.

Consult Your Accountant- Remember; It’s not how much money you make, but how much money you keep that matters. Make sure your fund is a good match for your current tax situation.

Mutual funds are a great way to diversify your investments and they can be a wonderful choice to balance the more aggressive and riskier aspects of your wealth building plan. However like all forms of passive income, investing in mutual funds requires a lot of work and research upfront. If you’re diligent about putting in the necessary time and effort, you can end up with a mutual fund that will expand your nest egg considerably in the years to come with little additional effort.

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I love technical analysis. To me it’s clean, precise, and easy to understand. But to others technical analysis is tantamount to reading tea leaves or pig entrails. What these people don’t realize is that technical analysis isn’t about divining the direction of a financial product; it’s about identifying the probability of a price movement in a certain direction for a certain distance.

For those of you who love the thrill of short term trading and have the guts to weather the swings, here’s a list of my top three chart patterns.

Channels

I get goose bumps just thinking about price channels. I feel especially elated when the channels form near historical highs or lows. The thing that I love most about channels is that their price range is so well defined. If the price of a financial instrument is fluctuating within an eight-point range, then a potential profit of around 7 points exists when the issue is either near the top or the bottom of that range. Once the price approaches a support or resistance line, you buy or sell respectively then exit the position when the price reaches the other side of the channel.

Even if you’re wrong you only risk one and a half to two points and you can reverse your position knowing that a channel breakout will likely continue. Channels have great risk to reward ratios with easily defined support and resistance points.

Triangles

Triangles are almost as good as channels. The only difference here is that I’m looking for a breakout. By the time a triangle pattern is apparent, the price range is usually too narrow to trade profitably, but a breakout will often go the length of the triangle’s widest point before consolidating. Depending on the size of the triangle, this move can be very lucrative.

The downside to triangles is that they occasionally change dimensions. At first a pattern may look like an ascending triangle then a price move changes the pattern to a right triangle. This uncertainty adds an extra degree of risk to triangle trading.

Flags and Pennants

Flags and pennants are continuation patterns. After a major move, prices usually consolidate as people take profits and reevaluate their positions. Once these patterns finish, the primary trend usually resumes.

A flag is formed when price retraces. Flags look like small diagonal channels that run counter to the primary trend. Once this channel is broken, you can expect the primary trend to continue for at least the size of the flag. However flags have an ‘X’ factor. You never know when, or if, they’re going to end. You may watch a flag for a couple of days before you realize that it’s not really a flag, but a reversal. By then it’s too late to do anything.

Pennants, on the other hand, are easier to predict. Like flags, pennants are continuation patterns caused by profit taking and market uncertainty. These patterns look like little triangles because they start wide and get progressively narrower. This characteristic makes a completion point easier to predict. Once the pattern is complete, the primary trend can be expected to continue for at least the size of the pennant’s widest point.

Technical patterns are one of the easiest indicators to trade. There are no complicated formulas to follow and the risk to reward ratio can be incredible. If you’re just starting to use technical analysis, give patterns a try. It’s a great way to earn some money while you learn more about the behavior of your market.

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