Mutual Funds -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business.
At this point, we’ve come to two conclusions: First, you should invest in stocks, if at all possible, and second, you should hold on to these stocks as long as the companies behind them continue to do well. The next thing you have to decide is whether to pick your own stocks or let somebody else do it.
There’s a lot to be said for taking the easy way out, especially if you are bored by numbers and couldn’t care less what happens to Kodak’s earnings, or whether Nike makes a better shoe than Reebok.
That’s why mutual funds were invented—for people who want to own stocks but can’t be bothered with the details. In a mutual fund, your only job is to send money, which gives you a certain number of shares in the fund. Your money is lumped together with a lot of other people’s money (you never actually meet them but you know they are out there). The whole pile is handed over to the expert who manages the fund.
At least you hope there’s an expert in charge, because you’re counting on him or her to figure out which stocks to buy and when to buy them and sell them.
A mutual fund has another advantage, besides having a manager who does all the work. It invests in many companies at once. As soon as you sign up with a fund, you automatically become an owner of the dozens, even hundreds of companies the fund has already bought. Whether you invest fifty dollars or $50 million, you still own a piece of all the stocks in the fund. This is less risky than owning only one stock, which if you’re a novice investor might be all you could afford.
A typical fund allows you to get started with as little as fifty or one hundred dollars, with the chance to buy more shares whenever extra cash comes into your possession. How much and how often you contribute is up to you. You can take the guesswork out of it by investing the same amount every month, three months, or six months. The interval isn’t important, as long as you keep up the routine.
Can you see the wisdom in this sort of installment plan? Your worries about where the stock market is headed from one year to the next are over. In a correction or a bear market, the shares in your favorite fund will get cheaper, so you’ll be buying more at low prices, and in a bull market you’ll be buying more at high prices. Over time, the costs will even out and your profits will mount.
As an added attraction, many funds pay a cash bonus in the form of a dividend. It comes your way on a regular basis—four times a year, twice a year, or even twelve times a year. You can spend this money however you want—on movie tickets, compact disks, sunglasses—to reward yourself for investing in the fund. Or you can do yourself a bigger favor by using the dividend to buy more shares.
This is called the “reinvestment option,” and once you’ve chosen it, your dividends are reinvested automatically. The more shares you own, the more you stand to gain from the future success of the fund, which is why your money will grow faster if you throw the dividends into the pot.
You can follow your fund’s progress by looking it up in the newspaper, the same way you look up Disney or Wendy’s. The price of a share in a fund goes up and down every day, and it moves more or less in lockstep with the prices of all the stocks in the fund’s portfolio. That’s why you want to invest in funds with managers who have the knack for picking the right stocks. You’re rooting for the managers, because the better they do, the better you do.
Saying good-bye to a fund is easy. You can take your money out any time you want—either all of it or some of it—and the fund will send you a check immediately. But unless there’s an emergency and you have a sudden need for quick cash, getting out of a fund should be the last thing on your mind. Your goal is to sell your shares for a much higher price than the price you paid to acquire them, and the longer you stick with the fund, the bigger your potential profit.
Along with the chance to share in the gains from a fund, you’re also paying a share of the management fees and the fund’s expenses. These fees and expenses are paid out of the fund’s assets, and they generally cost investors between 0.5 percent and 2 percent annually, depending on the fund. That means when you own a mutual fund, you’re starting out every year somewhere between 0.5 percent and 2 percent in the hole, and on top of that, the fund must pay a commission whenever it buys or sells a stock.
The managers are expected to do well in spite of the expenses, by being clever and picking the right stocks.
These professional stockpickers have an advantage over the millions of amateurs who do their own picking. It’s a hobby for amateurs, but for the pros, it’s a full-time job. They go to business school to learn how to study companies and decipher financial reports. They’ve got libraries, high-performance computers, and a research staff to back them up. If there’s important news out of a company, they hear it right away.
On the other hand, professional stockpickers also have limitations that make it easy to compete with them. You and I could never beat a professional pool player at a game of billiards, and we couldn’t do brain surgery better than a professional brain surgeon, but we have a decent chance of beating the pros on Wall Street.
They are part of the herd of fund managers that tends to graze in the same pastures of stocks. They feel comfortable buying the same stocks the other managers are buying, and they avoid wandering off into unfamiliar territory. So, they miss the exciting prospects that can be found outside the boundaries of the herd.
They are part of the herd of fund managers that tends to graze in the same pastures of stocks. They feel comfortable buying the same stocks the other managers are buying, and they avoid wandering off into unfamiliar territory. So they miss the exciting prospects that can be found outside the boundaries of the herd.