A mutual fund is a great place to start investing. They can simplify the more complex areas of investing and allow you to start today.
By investing in multiple investments, you lower your investing risks. If one of those investments goes bankrupt, you will have others to keep you from losing your entire account. Spreading your money into different investments is called diversification.
Some common ways to diversify are by having different asset classes, investment objectives, and locations. Some asset classes are stocks, bonds, certificates of deposit (CD), annuities, and real estate. Some of these investments may have an objective of growing rapidly, while others may want to prevent you from losing money. Picking investments in different parts of the country, or even the world, adds another layer of diversification.
Diversification is a great tool, but it is not perfect. When the news is telling everyone the world is about to end, they are often only talking about the US stock market. Diversification helps your account do better than if you were not diversified. On the other side, if the news is talking about how great the market is doing, diversification will keep your account from growing as fast. Picking the right degree of diversification is important.
Mutual Funds Help Solve this Problem
Mutual funds offer a wide range of diversification options. Mutual funds help you diversify your stocks and bonds. A stock fund will purchase stocks, a bond fund will have bonds, and a balanced fund will be about 60% stock and 40% bonds.
There are mutual funds that allow you to pick the proper objective for you. Aggressive and growth funds will buy stock in growth-oriented companies. Value funds will purchase stock in companies that are less growth oriented and use their profits to pay dividends to the shareholders. Income funds will invest in mostly bonds and pass the interest they receive on to you.
Lastly, you can invest by sector. If there is a part of our economy you really feel will grow in the future, you can invest in sector funds that buy stock in companies focused on that sector. A great example of sector funds is healthcare funds. Healthcare funds invest in companies that service the healthcare indusry buy making medicine, machines, supplies, or even software specific to that industry. Other examples of sector funds are clean energy, energy, natural resources, real estate, or technology.
While sector funds offer diversification inside the sector, they are not very well diversified. Since they focus on one industry, they can become more focused than other funds. I generally only recommend a small portion of your investments is in sector funds.
Mutual funds can even make picking your allocation easier. Many companies now offer target-date funds and portfolio funds. These are “1 fund and done” solutions. Target date funds pick a diversification mix that is appropriate to when you expect to use the funds.
Many target-date funds are called retirement funds. The year in the name is the year you expect to begin taking money out. A target-date fund may be called The Retirement 2050 Fund. This fund will adjust as time goes on to become less risky and will expect you to take your first retirement paycheck in January of 2050.
Portfolio funds, on the other hand, allow you to pick an objective and will buy the right mix of asset classes to help you achieve that objective. A portfolio fund may be called Growth Portfolio and will buy stocks and bonds in a heavily growth-oriented combination.
Mutual Funds are Mutually Funded
One of the main problems with diversifying is the cost. It can cost a lot of money to own many different investments. Mutual funds help this problem. With a mutual fund, a large group of people pools their money together to buy many investments.
Since most people cannot afford to buy 100 shares of Amazon ($1,743 per share or $174,300 in total), mutual funds make investing in stock more affordable. As a group of investors, you can take multiple million dollars and buy a diversified portfolio. Each investor owns a share of the portfolio based on how much they contributed. The more you contribute, the more you own.
It’s nice to know that the amount you contribute does not affect your rate of return. Someone that buys one share and someone that buys 1,000 shares will both make the same standard of performance (percentage your account grows, not the actual dollar amount).
Are you confused yet?
Investing can be confusing. I do not want to load you up with this information and then send you into the world with no clue what to do. Here are some tips to make investing more comfortable for you.
1. Pay attention to the fees and what services you get for them
If you are working with a financial planner, make sure that he is both educating you and helping you through the year. Many advisors sell an investment and disappear. Once they receive the commission, they often cannot afford to continue helping you.
You are best to work with a Registered Investment Advisor that is Fee-Only. They do not receive a commission but are paid a yearly fee to help you.
2. Do not be afraid to use portfolio or target-date funds
If you are going to do it yourself but do not want to spend your free time reading books and studying, target-date and portfolio funds are great. They are slightly more expenses than the same mutual funds they use to make their portfolio but make investing easy.
3. Index Funds are Usually The Lowest Cost Funds
Index funds are a great and simple way to invest. They do not change the investments they have very often. By not trading often, index funds keep the fees you pay low. Lower fees mean more money for you.
While investing can be complicated. Mutual funds are a great place to start.
If you would like some guidance, please contact me at firstname.lastname@example.org