Maybe you’ve decided that it’s time to invest in your children’s college savings. Perhaps you’ve paid off debt and are now looking for a greater return on your money.
Where do you invest your hard-earned cash? Try a mutual fund!
A mutual fund is an investment wherein investors pool money to purchase a mix of securities that would otherwise be too costly to each individual investor.
Mutual funds are awesome because they a) offer instant diversification, and b) they’re usually managed by someone who has much more experience than you or I.
They might not be as intriguing as day-trading or single stock purchases but they’re much more likely to give a reliable return over the long haul.
How to Choose a Mutual Fund
Determine your level of risk. This is actually a two-part calculation.
- What is your expected holding time? Within a short time frame a riskier fund would be unwise. This is due to the more volatile nature of these investments over the short-term.
- What is your personal risk level? Are you comfortable with seeing a more up-and-down return, or would you prefer a slow & steady approach?
Consider your optimal asset mix. “Asset mix” is just fancy talk for where your investment holds its assets.
A Mutual fund consists of various assets all mixed in a pot and then ladled out to fund investors (you and me!) The types of assets that are added to the pot constitute the asset mix.
Is the mutual fund heavy on stocks and light on bonds? That’s a growth oriented strategy. Are you scared of stocks, instead loading up on bonds? You’ve discovered an income-based asset mix.
Keep in mind, the more that you lean toward stocks and away from bonds and cash, the greater the potential risk and return.
It’s worth noting that Dave Ramsey recommends investing across four asset classes: growth, growth & income, aggressive growth, and international funds.
Search The Fund Selector at Morningstar for mutual funds that meet the criteria above. Registration for this tool is free. While searching the fund selector consider the risk and asset class as well as the following:
- Longevity. The fund should have been in operation for at least 5 years, preferably more. Historically high returns don’t guarantee a similar future, but this data allows the investor to see that the fund has been well managed.
- Low fees. Choose funds that have low expense ratios. The expense ratio is the ration of fees to assets and is comprised of various ongoing fees for maintaining the fund. There’s no correlation between expense ratio and performance, so just look for a well-performing fund with low fees.
- The morningstar rating is a good indicator of overall past fund performance. Though you shouldn’t consider this rating as an “end all, be all” investment chooser, it’s a helpful measure of behavior. Here’s a look at how the morningstar rating is calculated.
After researching, choose a fund and complete the required paperwork though the selected investment company.
I’m partial to Fidelity. Their online page is simple and helpful, they have a wide range of well-performing funds, and their customer service is great.
Automate the investment. The single most effective way to invest is to set up automatic withdrawals that consistently move money straight from your paycheck (or bank account) into your investment.
Given that you are sticking to a monthly budget, you’ll be able to squirrel away a small amount each month. Even if it’s only $20, it’ll make a dent in your savings goal.
Using automatic withdawls consistently is the single most important step you can take to meet your goal.
Reevaluate often. Have you gotten a raise? Assess your budget and consider upping your automatic withdrawal amount.
Don’t reconsider your purchased mutual fund, just reevaluate whether you are able to add even more to your automatic withdrawal.
Don’t worry when the market goes up or down. You’re in it for the long haul, baby. Ride that wave and don’t look back. The worst thing that you can do is try to time the market. Relax confidently, knowing that your money has been invested carefully, according to your stipulations.
Just like the humble Clydesdale, these investments will plod along for years to come, providing a much better return than you’ll achieve in your savings account. Choose carefully and then sit back and relax with confidence.
It’s so exciting to think that our invested money is providing funds for businesses all across the globe to expand and excel, while creating a profitable return!