In my last column, I talked about the importance of investing and how to go about opening a brokerage account. Now, it is necessary to think about where to invest your money.
Essentially, a mutual fund is a collection of investors' money given to a professional money manager who decides what individual stocks to buy and sell. Whereas access to professional money managers often requires minimums of $1 million or so, many mutual funds permit investments of only $2,500. Many brokerages, banks and firms that specialize in money management offer mutual funds.
Mutual funds have many advantages over investing directly in stocks.
Access to a professional money manager is one of the biggest advantages of mutual funds. Many managers have spent their careers investing millions, or even billions, of dollars worth of client assets.
Keeping a portfolio of mutual funds also requires much less of a time commitment than holding individual stocks. Since a fund manager oversees your money full-time, he or she is always watching the market and making the buy and sell decisions. As an individual investor, it is difficult to match the time a professional investor can devote to managing your money.
Professional managers also have resources inaccessible to the individual investor. Professionals have access to the top research on Wall Street, keep in close contact with company management and have the ability and willingness to visit companies. No individual investor can make up for these resources.
A final advantage of a mutual fund is the diversification that it provides. A mutual fund can permit you to spread your money over 30 or more stocks, but the same amount directly invested would only be able to purchase one or two stocks.
Therefore, if you are in the stock market to make money, you should use mutual funds as your investment vehicle of choice. Very few individual investors can expect to outperform a good money manager. Only directly invest in stocks if you get personal enjoyment from investing in the stock market or have a desire to learn about businesses and the markets. If you fall into this latter category, consider placing the majority of your money in mutual funds with a small portion set-aside for you to invest directly in stocks.
Because there are so many mutual funds, it can be difficult choosing the best one for your portfolio. The first thing to look for in a fund is an experienced manager with consistent long-term performance. Keep in mind that past performance does not necessarily guarantee the same in the future.
Also, look at the fund's expenses and any loads that it may charge. Most funds automatically deduct around 1 percent of assets as payment for various expenses, including management fees, but do not pay much more. Avoid funds that charge loads, sales commissions that can be as much as 5 percent. You should have no trouble finding an attractive no-load fund.
The investment style of the fund also needs to be considered. Each style involves varying degrees of risk and may deliver different returns. A Growth and Income Fund is a good first purchase for someone not wanting to take too much risk, because it mainly invests in larger, more predictable companies.
To make the task of choosing a fund easier, you may want to consider an index fund. Index funds, or passive funds, buy all the stocks in a particular index, and therefore, their performance matches the market (minus any expenses). Although they will not underperform the market, they also will not outperform. The term market is usually used to mean the Dow Jones Industrial Average or the Standard & Poor 500, which are compilations of some of the 30 or 500 largest United States-traded companies, respectively.
Before purchasing a fund, perform a little research. A great source of information is the Morningstar rating service, available behind the Perkins reference desk.
Eric Weisman is a Trinity senior.
This article is not intended to replace the advice of a professional financial adviser. This article is also not intended to solicit readers to buy or sell, nor is the author licensed to do so.
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