My family never really followed Judaism, but yet they decided to go ahead and buy $500 worth of mutual funds for my 21st birthday.
Instead of immediately cashing it in, I’ve decided to hold on to it and attempt to learn more about what I can do with it.
This all starts with this post and eventually I will be typing in “mutual funds” into the Google search bar.
While I can search for the basics myself, I think that Dopers would have a better idea as to what sources are most the credible in the world of economics.
That was probably a lame joke, but Jewish people are stereotyped to save money.
We’re all Jewish BTW, and I just fund it amusing that we played into the stereotype that’s all.
Wikipedia has a decent overview of what a mutual fund actually is. The short version is that when you invest in a mutual fund, the manager takes your money and lumps it together with all the investors to buy a bunch of assets. The big advantage is that you can end up with much greater diversification than you would trying to buy these things on your own.
Lakai - It sounds like they gave you a “gift certificate” of sorts? Is it with a particular company or broker? They often have several different investment options, where the mutual fund groups have different types of stocks and bonds in different portfolios. Perhaps you can request some literature directly from them?
I’d suggest a vist to your local library. There are plenty of good books on how mutual funds work, the different types, how to compare and choose a good one, etc. Most of the better books are wriiten so as to be easily understood. Pick up two or three and read them, you should easily understand the basics within a few days. Then, if you’re interested, you’ll be able to expand your knowledge from there.
Yea, that is what I thought of doing, but I didn’t want to make the mistake of picking up a book by someone who has no idea on what he’s talking about. Think of it like someone asking for help in politics and then steering him clear of Micheal Moore and Ann Coulter.
Keep in mind that I know nothing about economics or mutual funds.
The only one that comes to mind is Sylvia Porter. She’s a bit dated, but you’ll still get a good understanding of the basics. You should be able to weed out the “get rich quick” hucksters by reading the flyleaf of each book.
Not just about mutual funds, but an easy to understand, definitely non-huckster book about getting started in investing would be “The Bogleheads Guide To Investing”.
A “boglehead” would be a person who follows John Bogle’s (founder of Vanguard funds) formula for investing.
Anyway, some basics:
A mutual fund is a collection of other stocks. When you purchase “shares” of a mutual fund, you are really purchasing partial shares of all the companies that fund holds. You’re instantly “diversified”, that is, you’re not subject to the whims of an individual company.
If you go to a page for a fund, for instance, click on the link that says “holdings”. It will show you what the largest holdings in that company are. For that one, you’re buying some Exxon, some Microsoft, some Pfizer, etc.
Mutual funds have fees associated with them. Sometimes these are taken off the front, sometimes they take a percentage each year. That doesn’t happen when you buy a stock. You’re paying someone to pick which companies are in that fund. Never consider these fees “negligible”. They are your enemy.
Commissions for mutual funds can be higher than for stocks. At Ameritrade, buying a stock costs $10 (2% of your investment). Buying a mutual fund costs $50. That is, you’ll wind up investing only $450 of your $500. Even if the fund goes up 10% in it’s first year, you’ll only have $495 (450+45).
Mutual funds can also be “sector specific”. You can have a fund that is just IT stocks, just beverages, just banking, just airlines, pretty much anything.
A lor of mutual funds have minimum purchase requirements, and usually these are higher than $500.
What I would tell you to look into is an ETF, an “exchange traded fund”. These trade like stocks, but they are basically funds. There are hundreds of these. Go to finance.yahoo.com, click investing, click ETF’s.
An example would be VTI. That’s Vanguard’s total market fund. It basically owns every stock in the stock market. The advantages of having this over a mutual fund is that it only costs $10 to purchase and sell. And, the management fees are smaller than a mutual fund. Again, you’re instantly diversified.
The one disadvantage to owning an ETF is that you can’t automatically reinvest dividends. With a mutual fund, they’ll purchase additional shares of the fund with your dividends.
My last bit of advice: open an online account. It’s usually the cheapest way to trade, and especially with only $500, every penny you can save on trades makes a big percentage difference. I consider fees and commissions the enemies of the investor, especially the small investor. Start thinking about them now with your $500, and you’ll avoid them when your retirement account hits $100,000 and your advisor (who will treat you like his best friend) is skimming $2500 off it every year for recommending investments that will probably underperform your Vanguard ETF.
As Trunk mentioned, mutual funds are made up of stocks. Seems like unnecessary information, but is overlooked by many amateur investors. Investigating the stocks within a mutual fund is as important as researching the fund itself. There are many good books out there; one oldy but very goody is Beating The Street, by Peter Lynch, one of the most successful mutual fund managers ever.
There’s a very important lesson here, so pay attention: the average percent change for a fund (or any other investment, really) don’t actually tell you what’s happened to the money invested in it. Here you have a fund that lost 10% and then turned around to gain 10%. That’s an average of 0% gain, right? But you’ve still got less money than you started with. Even if the second change had been a 10.67% gain, and resulted in an average gain of .67%, you’d still have lost money.
If someone quotes you a geometric mean for an investments gains and losses, that’s worth paying attention to. Averages are just red herrings.
This isn’t entirely true. I can’t think of any funds I’ve seen that don’t involve stocks, but I can’t think of any that didn’t involve at least bonds, and quite a few have real estate and other assets.
One type of fund that is generating a lot of interest lately is “target retirement funds”.
What these are are funds that follow what is commonly referred to as “modern portfolio theory”.
When you’re young, they will invest a large portion of your money in stocks, and a small portion in bonds. As you near retirement, they will start shifting your money towards bonds instead of stocks so that your retirement egg is less volatile.
Also, to the OP (something I wish I knew sooner): If that’s really for retirement planning, and not so you can double your money in a year to buy an Xbox. . .put the money in a Roth IRA.
Cons: you can’t take it out without penalty until you’re 60.
Index funds (my favorite) are an example. These are special mutual funds which simply emulate the common stock market indexes, like the S&P 500, by purchasing shares in all the companies that proportionally make up that index.
The advantages of an index funds:
Since there’s no need for a manager, the fees are much lower.
Since the stock market indexes are designed to be representative of the whole market, you get excellent diversification.
You can get a good idea of how your fund is doing by just looking up the index on the news.
I have an account at Sharebuilder.com wherein they automatically reinvest dividends at no charge for my once-monthly purchase of SPY (the S&P 500 ETF). I think they only do this for people who set up periodic stock purchases (for $4 per trade). I like this because it’s all automatic and because I’m too lazy to research good mutual funds. SPY is a good, basic, diversified ETF. (I am not a paid shill for Sharebuilder; past performance is no guarantee of future gains; etc.).
Also, mutual funds do this weird thing at the end of each year where they may end up declaring profits that you have to pay taxes on, even if you haven’t sold any part of your share. This confuses me and therefore must be evil.