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Mutual Funds > Mutual Funds |
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Mutual Funds
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From an historical point
of view, mutual funds have been around for
hundreds of years, but they are a relatively new
investment phenomenon to novice investors. By
definition, a mutual fund contains more than one
holding, so the people who like to talk about
stock picking may not mention mutual funds when,
in fact, they are brilliant ways to invest your
money without having to worry about losing it.
Mutual funds evolved as a way for many people to
invest little chunks of money in a variety of
stocks at one time. As a financial product, mutual
funds have a history that's
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unsurpassed in bringing similar benefits
to smaller investors as enjoyed by already-wealthy
investors. The right funds minimize risk, maximize
profits and outperform the majority of individual
stocks.
Mutual funds are a conglomeration of stocks, bonds,
securities and even real estate, put together by a smart
fund manager who hand-picks winners for a winning
combination. Individual investments are chosen by mutual
fund managers, typically successful stock pickers who
have been chosen to lead and to define the constituents
of a particular mutual fund. Some funds are
wide-ranging, with investments in a variety of sectors
such as health care, energy and computer stocks. Others,
somewhat belying the diversified nature and purpose of
mutual funds, specialize in one sector and are content
to be diversified within that investment arena of, say
banking or bonds.
Mutual funds are ideal for the novice investor, because
if you pick a good fund, you won't lose money on it.
Mutual funds tend to be more stable than individual
stocks because of diversification: when one sector is
doing poorly, others will be doing well, and a properly
diverse fund will contain a variety of companies, and
ideally the best of the best in the first place, so that
it is unlikely that any will actually fail. Chosen by
long-time (ideally) stock pickers whose bread-and-butter
comes from being careful, but not too careful, the right
funds will bring you a return of between 10-13% on your
investment.
Another major benefit of mutual funds is that you can
find some that will let you start contributing with as
little as $50. You don't have to save up a giant ostrich
of a nest-egg to start investing, and that's a big bonus
to most of us, since it doesn't create an unnatural
strain on the wallet. You can make contributions by
direct deposit or by sending a check or Paypal order to
your brokerage, and every time you buy, you acquire a
few more shares in the fund. If you need to sell your
shares to get liquid for something like a down payment
on a house or even a big Christmas bill, you can usually
turn your shares back into cash in a couple of days. And
IRAs can be made up of mutual funds, which will keep
your money safer than buying a single stock at a time
and save you the hassle of choosing your own stocks
before you're really sure what the best ones are.
Mutual funds nearly always outperform individual stocks
because they do tend to contain the best of the best,
because they are chosen by people who really know the
market and because of diversification. They aren't sexy:
you aren't going to make an overnight fortune with your
mutual fund. But with steady investing, you're going to
make a return on your investment that will make you
wonder why anybody bothers with a low-interest savings
account.
The most dangerous thing about mutual funds is the
people who sell them. Some people purchase shares in a
mutual fund, but then lose a lot of their investment
money in paying fees and commissions to the brokers.
Brokers who work on commission may truly believe you're
getting more for your money when they sell you their
brokerage's "favorite" fund, but you're not. Here's why:
For starters, you can divide mutual finds into two
groups: "load", and "no-load" funds. There are actually
more groups than that, which we'll discuss soon, but
what you need to know from the start is that you want a
"no-load" mutual fund. That's because the "load" (or
"front-end load") is a sales charge that you pay right
off the bat, which goes to pay your broker's commission.
Now, brokers have a right to make a living, but in the
case of mutual funds, they don't actually do anything.
The fund is managed by a financial hot-shot in New York
or D.C., and the person you hand or mail the check to
isn't going to do anything besides send a fax. With
front-end loads often costing 4-5% of your overall
investment, there's no reason you should be giving it
away when you don't have to.
One more thing: even no-load funds are allowed to charge
fees for marketing, and as long as they keep the fees
(called 12b-1) at less than .25%, they are still called
no-load. But some funds charge more fees: some charge a
no front-end load, but will charge a "redemption" fee if
you sell your shares in less than 5 years, or maybe 2
years. The fact is, mutual funds can charge just about
anything as long as they can find people willing to pay
them, so it's incumbent upon us, the consumers, to read
very carefully the company disclosure statements before
choosing a mutual fund. You can get great mutual funds
that are no-load and pass on small operating costs to
the customer. Don't let anyone talk you into something
more expensive.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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