Every one who knows even a little about investing knows about “diversification.” It is one principle of wise investing that is easy to understand. For those in the know, mutual funds (especially no load mutual funds) are one key solution.
Mutual Fund Diversification
Some of the most highly rated stocks have suddenly fallen into disfavor and lost value leaving owners in dismay. Not long ago there was a large group of happy Enron stock holders; today there is a large group of Enron Creditors Recovery Corporation members.
One way to avoid being caught in such a trap, having too much of our money in too few investments, is to invest in mutual funds. A mutual fund is a single fund that invests in dozens or even hundreds of different stocks, or bonds, or a combination of the two. Or, as in the case of money market mutual funds, in short-term debt instruments.
Mutual Fund Options
Of course, simple is never left alone. And that is certainly the case here. The first complexity comes with the choice of stocks and bonds in the funds. The options are almost limitless and there are thousands of funds available, each with a different selection.
Many funds select stocks only from certain sectors of the market. Examples might be utilities, tech stocks, or international funds. Others relate to certain social views such as “green stocks”.
People often choose funds based on the manager of the fund more than the stocks in it at a given time. Some years ago I invested in the Magellan Fund solely because of the reputation of Peter Lynch, its manager. It was one of the best investments I have ever made because I recognized his competence before most others so I multiplied my money several times in just a few years.
Invest in Index Mutual Funds for Safety
For the average investor, the most important type of mutual fund to know about is the “index” fund. Index funds invest in all the stocks in their sector or index. The two most important of these are the total stock market index fund and the Standard & Poors 500 index fund.
My recommendation for most people is to invest in these two types of index mutual funds. They outperform a majority of all funds, consistently doing better than about sixty percent of all funds.
You never know which funds will be best at any given time, but you can predict what these funds will do. For that reason I think for most people they are the best bet because they are much safer.
How to Buy Mutual Funds
Many people buy mutual funds through brokerage firms. Banks and other financial firms often have departments where these funds can be purchased (note the sign on the door that points out that these funds are not government guaranteed as are regular bank deposits).
The least expensive way to invest in mutual funds is to buy directly from firms like Vanguard or Fidelity. This avoids the investment charges associated with other firms. Funds purchased in this way are referred to as no-load funds.
NOTE:
Many investors are cautious at this time and with good reason in view of the national and world economic crisis. Many indicators suggest that there may be a continuing decline of stock values. Never invest in stocks with a short view in good or bad times. They are unpredictable short term.
Personally I am continuing to invest modestly considering each decline as a fire sale. In the long term prices are likely to sky rocket as an inevitable inflation develops in my own view. I could be very wrong, and I am in the view of many, but when the government prints money as they have in recent times without accompanying economic productivity I do not know how it can be avoided.
Know About and Use Mutual Funds
Mutual funds are at the heart of the investment world today so it is important to know about them. They are the most used method to provide for investment diversification. Most people (that likely means you) will want them to be a primary part of their retirement and other investments.
