Wednesday, May 25, 2011

STICK WITH MUTUAL FUNDS








A big mistake we make when we start saving money is to not leave it alone. Once the account balance reaches a certain level we begin thinking where we could invest all that cash. It is very tempting to start buying and selling stocks.


There is only one way to purchase individual stocks, and that is to buy and hold. Otherwise, it is just a sophisticated form of gambling. In my opinion, the vast majority of the public should avoid individual stocks. It is too risky.


A much safer method is to purchase mutual funds. It spreads the risk. Instead of investing in just a few stocks, a mutual fund allows your risk to be spread over thousands of companies with a small amount of money. You won't have the big gains of an individual stock, but you won't have the potential for big losses either. If you educate yourself, you can use a no-load company such as Vanguard. If that scares you, go visit a financial advisor. However, be prepared to pay a commission, typically $5.75 for every $100 invested. There are mutual funds for every level of risk.


Just before the 2008 economic downturn I invested a large sum for an older couple. The market at the time was red hot. However, because of their age and ignorance regarding finances, I recommended a mutual fund specializing in government securities. Prior to this time their money had been in CDs. Shortly afterwards, the market crashed. Their investment, however, continued to earn almost 6%. Their risk tolerance and age dictated a conservative approach. If they had been able to educate themselves and self-direct their money, they would have saved even more by not paying commissions. For them, however, they made the right decision.


It's never too late to get started. Read the Wall Street Journal. Subscribe to Money magazine. Take charge of your financial future.

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