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MINUTE 4:  Mutual Funds

What is a mutual fund?  Think of it as a single stock (or bond) that is made up of a collection of stocks (or bonds).  Analysts at a mutual fund company have put together a these mutual funds to help investors meet certain goals.  If the investor is wanting to invest for retirement, the mutual fund company will start a "retirement"-oriented mutual fund by buying a lot of stocks that will perform well over the long term.  Mutual Funds are an excellent way to get your feet wet in the market.  In fact, many investors never move beyond mutual funds. 

The benefits of the mutual fund are great because:

• You can invest in a lot of stocks without buying individual shares in all the stocks.

• You spread the risk among several places.  For example, if a single company's stock drastically falls in value, it won't affect the overall mutual fund value because they will have bought a lot of other stocks that are not going down in value (hopefully!).  

• You can invest with very little money.

• Mutual Funds are a little higher risk than MM accounts, but they also yield a better return overall.   

Also, you can keep growing your money here while you learn more about investing in general.  (See our article "Raiding Piggy" for more info on how to locate some good "large cap" funds.)  Your next investment choices after this are riskier mutual funds...or moving directly into stocks and bonds (Minute 5)!

The final stretch.  First, let's review.  We learned that you must have a goal for your investment...and that as your potential investment return goes up, so does the risk of losing some or all of your money.  Then, we talked about a Rainy Day fund, setting aside 3 months of living expenses for emergencies in a MM account.  Then, we just covered getting our feet with with Mutual Funds.  OK, on to Minute 5....  

After you have mastered the first 4 Minutes, then you are ready for Minute 5...but not before!  Be smart and build your financial foundation right...having some money invested in all of the options we suggested, not just stocks!

Stocks and bonds are simple.  Owning a stock means that you own a piece of a company.  Owning a bond means that the company owes you some money.  Stock has more potential, because you own potential returns...but you also own the potential risk that the stock will go under.  So, based on what we learned, we know that owning stocks can give you the highest return of all...but you could lose everything!  

With stocks, you get a portion of whatever the company earns or loses.  In the case of "earn", you might even get a dividend, which is a cash payout of your portion of earnings.  However, most of the time investors count on the value of the stock rising rather than getting a dividend.  

Bonds are sure money.  When you own a bond, you have a much surer chance (less risk) of making a moderate return...rather than a fair chance of making a great return, like in stocks.  With bonds, you get interest payments on a debt.

It takes a while to understand stocks and bonds...we won't try to explain them all here.  We suggest that you learn more about them as your money is growing in those large cap mutual funds we suggested.  

Final Point:  Don't take money from the Rainy Day Money or from your base in your mutual funds to invest in stocks/bonds!  Wait instead until you have a certain amount accumulated in investments...let's say $10-$20,000.  Then, use only NEW contributions to invest in stocks.