Matching Mutual Funds To Your Investing Needs

Mutual funds are an excellent investment vehicle for medium and long term investment strategies, but there’s a bewildering array of them, ratings of them, derivatives based on them, and a highly complicated jargon involved. Even more telling, the people you’re most likely to talk to about them (your investment broker) are people who get paid commissions to recommend funds to you. While we’re not going to impugn an investment broker’s motives (after all, he wants repeat business to keep earning those commissions) there are some questions and statements you need to make to ensure that the mutual funds you buy meet the aims you need. Its called Mutual Fund Suitability Compliance - matching mutual funds to your investing needs.

The first should be pro forma – you and your investment adviser should talk about your investment goals, whether they’re wealth preservation, revenue generation, or managed growth. Wealth preservation is buying funds loaded in stocks that are comparatively non-volatile; examples are Proctor and Gamble, or Archer Midlands. These are stocks that will increase over time (generally beating inflation by a few points). A growth-oriented fund is one that picks stocks with the potential for significant increases in the value of the stock over time. Examples of stocks in this sector would be Google or other new businesses just starting out, or businesses that have otherwise created a new market. Revenue generation funds are bond funds (or just buying bonds), or money market funds – these give a regular payout every month, but don’t have the best return rate.

What differentiates these three types of investment is the degree of risk undertaken by the investor. In general, the higher the risk, the greater the return – bonds and money market accounts are very low risk, but very low return. Growth funds have higher risks (but still less than picking individual stocks), while wealth preservation funds are useful for keeping a balance.

As you mature, your mix of funds in an investment portfolio should change. In your 20s and 30s, you’re almost always better off with a mix of growth funds and wealth preservation funds, with a modest amount of bond funds. The reasoning behind this is that your retirement is a good forty years away, and for the last 130 years, over a decade long period, the stock market has outperformed bonds and money market and savings accounts 85% of the time – and over 96% of the time when compared over a twenty year span. So, with a long time horizon, a growth fund gives you the maximum return on investment; as your earning potential increases with time (due to promotions and upgrading your career), this will also insulate you from market volatility. Your money market account is your “oops” account – use it to cover emergency expenses, or to accumulate funds for your house.

As you hit your 40s, and start hitting your maximum earning potential, the mix of funds should shift from growth-oriented funds to wealth preservation funds, while slightly increasing the holdings socked away in money market and bond funds.

As retirement nears, the ratio should shift again – more from wealth preservation to bonds to generate a regular income stream without crippling your growth rate. You’ll still want some growth funds in there to make sure that your wealth will remain there through the rest of your retirement.

When looking at fund suitability, be sure to talk this over with your financial adviser.

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Stock Versus Mutual Funds - Safe or Sorry?

It seems a little odd to compare stocks to mutual funds. Actually, mutual funds are largely composed of stocks. It is important to make the distinction between the two as there are some very real advantages to using mutual funds.

It is fun to invest in individual stocks because each company has its own story to tell. However, you want to focus on making money! Investing is not a game and should not be taken lightly.

When you invest in mutual funds, you are able to diversify and reduce your risk of losing money. Do you think that those wealthy investors out there just put their money in a couple of stocks? No! Either they are investing in mutual funds or are buying large numbers of stocks.

When you purchase mutual funds, you are hiring a professional manager at a relatively inexpensive price. It would be a little off the wall to think that you have more knowledge than a mutual fund manager! Most managers have been around the track a number of times and have the academic credentials to back up their knowledge.

Mutual fund companies have the advantage of capitalizing on economies of scale because they pool investors’ monies together. Since these companies have large amounts of money to invest, they usually have personal contacts at many brokerage firms and often trade commission-free.

Mutual funds are easy to take care of. The bookkeeper is much more challenged when there are hundreds of stocks to keep track of!

Mutual funds are very liquid. Put in your order for money in the morning if you are short on cash, and by the time the market closes you may have a check waiting for you. Stocks, on the other hand, are much more difficult. It all depends upon what you have invested in. CDs are not at all liquid and bonds are difficult as well.

If you are new to investing then mutual funds may be the way to go. You can invest small increments of money at regular intervals and not have to pay a trading cost. If you invest in stocks, you will find that they carry high transaction fees. This makes it quite difficult for the small investor to realize a profit.

If you are a wealthy stock investor, then you have it made because you get preferential treatment from the brokers. Wealthy bank account holders usually get the red carpet treatment from the banks. However, mutual funds do not discriminate. Whether you only have a paltry $50 or a huge sum of $500,000, you all get the same manager, the same investment and the same account access.

Generally speaking, mutual funds have a much lower risk than stocks. This is largely to diversification which was mentioned earlier. With stocks, there is always the worry that the company you are investing in will go belly up! With mutual funds, that is next to impossible.

As you can see, there are many advantages in investing in mutual funds over stocks. It is not to be said that you should never invest in stocks, but if you are just getting your feet wet with investing it would be best to go with mutual funds!

The Stock Market If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stocks Versus Mutual Funds. Learn How To Find stocks Which Will Double. Simple enough, huh?

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