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Revision as of 20:39, 27 May 2008
History of mutual funds
For many investors, the choice of possible investments can be overwhelming. There are stocks, bonds, commodities, securities and lots of other choices. One of the most popular choices is mutual funds. These diverse and complex investments have become one of the most popular ways to invest and Americans have been taking part in mutual fund investing for many, many years.
The first ever mutual fund, known as the Massachusetts Investors Trust was born in 1924, but the idea of a group of investors pooling their money together for one big investment goes back even farther. Evidence of this style of investing can be traced back to Europe in the mid-1800s. The staff and faculty at Harvard University were the first group to do it in the United States in 1893. It was this group investment that went on to become the very first mutual fund in US history.
To say that this first mutual fund was successful would be an understatement. The fund, which started out with 200 investors and a starting point of $50,000 dollars, grew to a value of almost $400,000 in the matter of a single year. If only every investor could get that kind of return!
To compare those numbers to today, there are approximately 10,000 different mutual funds available right now, representing 83 million investors inside the United States, making mutual fund investing one of the most popular and wide-spread forms of investing in the US.
The rules of investing in mutual funds changed dramatically after the great stock market crash of 1929. The Securities & Exchange Commission (SEC) was born, and with the help of two key pieces of legislation, the Securities Act of 1933 as well as The Securities Exchange Act of 1934,the government would take a pivotal role in trying to protect potential investors from getting ripped off. The SEC requires that companies file their financial information with them, so that investors can see which companies are healthy and are ready to grow, and which companies to stay away from.
The creation of the SEC did wonders for consumer confidence in mutual funds, and by the 1960’s the mutual fund market had exploded. There were an estimated 270 different mutual funds that anyone could invest in with a value of about $48 million dollars.
As you can see, mutual fund investing has had its ups and downs, and while a well run mutual fund is likely to make money, remember, there are no sure things in the investment world and you should always be careful when trusting someone with your hard earned money.
Don’t Chase The Best Funds
If you ask a seasoned mutual fund investor what the three biggest keys to successful investing are, he or she is bound to say discipline, discipline and discipline. What does that mean, exactly? It means avoiding the temptation to react with the news.
A common behaviour by many new investors is that when they hear on the news that a particular stock or mutual fund is poised to explode, they run to their computers or cell phones and switch over every penny in investments that they have to this new hot stock. While this practice can work some of the time, if it worked all of the time without fail, investing would be a lot easier and everyone would be doing it.
Discipline is the practice of sticking with your advised investment plan, even if a more tempting offer comes along. When you first start to invest, you should have a good idea of your risk profile, your short and long term goals and the amount of money you’re able to invest. You should pick a fund that meets all of those criteria and then settle in for the long haul. The only way to make a lot of money with mutual funds is to trust that they will give you the returns you desire, and stick with it.
There are times, however, when sticking with a fund may not be a good idea. If your fund is haemorrhaging money and has been for months, you may want to switch to a more stable mutual fund. But you can’t switch over your money with every bump and swerve in the market. Not only will fees and taxes eat your principle up, you’ll have no long term plan to help you invest and meet your goals.
The two biggest demons you have to deal with are fear and greed. Both of which are valid human emotions, but both can get in the way of logical, disciplined mutual fund investing. If you can manage both your greed and your fear, you can stay away from the lemming-over-the-cliff mentality that grips so many other investors. Mutual fund investing is one case where you do want to stay the course.
Temptation is a scary thing in all aspects of life. The temptation to run to the smoking hot and fashionable mutual fund of the week is extremely high, so high in fact that many investors take it like a month to a flame. If you don’t want to get burned, avoid the investment tips from your friends and use discipline as your number one investment strategy.
Determining Reward vs. Risk
The concept of risk versus reward is the basis for not only mutual fund investing, but investing altogether. The same system of risk versus reward can be translated to almost every part of life. When you analyze a situation, you can determine the possible risks of doing something and then the possible rewards of doing something and decide what the best course of action is for you. Determining your risk versus reward strategy for mutual fund investing is key.
The first thing investors of all stripes need to learn is that while mutual funds are a fun, exciting and easy way to invest, there is always a chance, no matter how slim, that you could lose every single penny you invest. That is one kind of risk. The other kind is the risk of not meeting your investing goals that you have set for yourself. This is a tightrope that every investor must walk, determining your risk while trying to earn the reward.
The risk associated with investing can be caused by many different factors. Things like general economic conditions, the rising or falling of interest rates and inflation are just a few factors that can cause a stock or a mutual fund to rise or fall. One of the best parts about mutual funds is that the risk involved in each fund is clearly stated BEFORE you invest. If you’re just looking to make a few dollars for holiday shopping, you can do that and keep your risk very low. If you are 25 and have a whole lifetime to invest for your retirement, there are mutual funds that can help you take big chances with even bigger rewards. If you lose your money, it’s not as big of a deal since you have your whole life to make it back.
Maybe the best advice you can take when analyzing risk versus reward is the fact that every stock, every bond and, yes, every mutual fund will fluctuate. This is an inarguable truism in the world of investing. There may be a few times when you sit down with your morning paper and you need two antacids with your morning coffee because your fund lost a few points. But with smart investing and good advice, you’ll have far more mornings where you leave for work with a smile on your face because your fund is doing well.
Analyzing risk versus reward is a huge part of investing and if you are having trouble figuring out how much risk to take, ask for help. You don’t want to enter into investing with a blurry picture of your risk vs. reward. The more you know about your personal situation, the better off you’ll be.
Criticism Of Mutual Funds
While mutual fund investing has exploded over the past 50 years to become one of the most popular forms of investing anywhere, there are still possible pitfalls that you can fall into if you’re not careful. Investing is still a risky business, even if everyone is doing it. Here are some tips to help you through any problems you might have.
One common criticism of mutual fund investing is that they don’t have a high enough return on their investment and that index funds, which aren’t as popular have historically returned a higher investment than the much more popular actively managed mutual funds.
A second common problem that some have with mutual fund investing is the use of load funds. You have probably seen the phrase “no-load mutual fund” in the newspaper or on television. The reason the no-load type of fund is preferred is because load funds come loaded with fees. These fees can run anywhere between half a percent, all the way up to 8.5 percent of however much you chose to invest. It’s thought that these fees are a clear conflict of interest as they clearly benefit the people making the sale and hurt the person making the investment. Load mutual funds are also thought to make your broker recommend funds that will maximize his fee, and not your investment portfolio.
Some investors also point to a perceived conflict of interest in regards to the size of the mutual fund. Most companies that manage the mutual fund charge a fee of between half a percent up to two and a half percent of the total amount of the funds assets. It’s thought that this fee could cause a fund to spend more on advertising than is actually needed so that they can get more people to invest in the fund and maximize their fee as much as possible.
The mutual fund market isn’t immune to scandals, either. In 2003, a scandal involving the practice of unethical and dishonest trading practices. Many funds were found to have participated in late trading and market trimming, both of which are illegal practices. You obviously don’t want to invest in a mutual fund that is engaged in illegal activities.
Mutual fund investing is gaining in popularity on an almost weekly basis, and a few bad eggs in the business won’t ruin it for everyone. However, it is always good advice to enter into any kind of investing with your eyes open, and if you feel your mutual fund is behaving improperly, there are authorities you can report them to.
College vs. Retirement
For most people, investing in mutual funds is pretty straight forward. You have specific goals that need to be met. You and your partner are approaching mutual fund investing with your eyes open and you’re both on the same page. Granted, she may want that pretty cottage down by the lake and you want that new speedboat, but both your goals involve water, and that’s close enough for you. But what if you’re in a completely different boat? What if you know you need to invest, but you have two equally important goals pulling you two different ways? This is the case with thousands of parents who see the need to save for retirement but also want to save for the kids’ college education. How can you do both at the same time? Here are a few tips.
One of the biggest factors in the college vs. retirement battle is the fact that people are putting off having kids until later in life these days. Fifty years ago, this wasn’t the case, and saving for both college and retirement usually happened during two distinctly different phases in one’s life. These days, now that we realize that saving for retirement is something that should be started when you’re 18, not 48, the two overlap more than ever.
The gut instinct of most parents is to put the kids’ future ahead of their own and cut back on retirement savings in favour of college. While this is a popular choice, it really only should be a last resort. A technique that is becoming more and more popular with parents who face saving for both at once is offering your prospective college student the chance to get matching funds from you. This is simply the idea that for every dollar they pay for, you’ll match it. If your not sure how junior will pay for half, remember, there are many ways for teenagers to save for college themselves. Almost everyone qualifies for student loans, there are scholarships for good grades as well as an after school and summertime job. Most college students work while they are attending classes, as well.
While walking the tightrope of saving for two goals at once can be stressful, a logical and determined approach to the situation is really the only way to go. Choosing retirement over your kids’ education isn’t a “wrong” choice, and neither is choosing college over retirement. Everyone’s situation is different and you need to make the right choice for your situation.
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