Monday, October 13, 2008

Money Monday . . . Mutual Funds

I know what you are thinking – with the market like it is HOW can you talk about mutual funds? Because if you have some extra cash (and even if you don’t) mutual funds are still a great investment. Most people don’t know a lot about them. Let me just disclose that I am not series 7 licensed (broker’s license), but I did work at a financial firm for over 5 years and so I have working knowledge about mutual funds. Yes, you have heard it before, but now is a great time to buy. Think of clothes shopping, do you buy at the peak of the season and pay full price – NO! You buy at the end of the season when the sales come out – same with stocks and mutual funds. Better yet, do some dollar cost averaging and buy mutual funds monthly so they average out to be a good price over the long run.

I advise you first read over this by Dave Ramsey. In it, he states this about mutual funds:

Mutual Funds:
25% into each of these four types of funds:
  • Growth
  • Growth & Income
  • Aggressive Growth
  • International
A shares (front end load); funds that are at least 5 years old or older; solid track record of acceptable returns within fund category.
*If risk tolerance is low, put less than 25% in aggressive growth or consider adding a “Balanced” fund to the four types of funds Dave suggests.

If this sounds greek to you don't worry. Here is how I look at mutual funds. First of all, Big Charts is a great resource to check prices and historical data about mutual funds. To check your mutual fund you have to know the symbol. Lets look at my FAVORITE fund. The name of it is Growth Fund of America. AGTHX is the symbol. I like this fund because it has a long track record (more than 10 years). You may click on the link and thing - what it is down 22% for this year. Yes, it is, but look at the ten year - up 8.49% and over its lifetime - up 14.18%. This is why you don't buy and sell mutual funds unless you are going to invest for 5 years or longer! I should back up. Below are things you want to know about a mutual fund in which you are investing:

How long has it been around? Ten years or more are the better ones.

What companies does it invest in? I always look at the top ten holdings and make sure I know the company and how it is doing. Always make sure they don't have more than 3-4% in one particular company (can you say Enron?).

What are the returns for the 1 year, 3 year, 5 year and 10 year? You would want to see that overall there has been more up years than down years.

Always buy class A shares! Dave Ramsey said this too, but with Class A shares you pay the fees up front and you know what you are getting into. Don't let them talk you into Class B or C.

Don't buy your mutual funds through a bank. You are limited to the funds you can get.

Don't be afraid of brokers. You can bo through Dave Ramsey's ELP to find good ones, but just like anything - do your own research. You may find it kind of fun.

When they tell you what funds to buy ask for a 1 page fact sheet. This should tell you the returns and also give you the top 10 holdings. Make sure you ask though if it doesn't.

Anyway, here is a quick explanation of what a mutual fund is. It is basically a hold tank for various stocks. Whether it is considered Growth, Aggressive Growth, etc. depends on its mix of stocks and bonds. Your financial advisor can tell you more about that. Ask your financial advisor to teach you some things.

It really is not as hard as you think and it is by far very interesting! Next week I will try to go over Roth IRA's and why you should definitely have one!

So, what do you think? Do you have mutual funds now and do you have favorites?


Picture from Money

1 comment:

Miney said...

I work for a mutual fund company, and you should definitely go through a financial adviser! There's so much involved with investing and retirement planning and we talk to people every day who have no idea what they're doing with their accounts.