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Investing in Mutual Funds

by Chris Cooper, Financial Planning Expert
March 04, 2016

Question: What should I keep in mind if I want to invest in mutual funds?

Answer: Mutual funds have been around since the late 1920’s.  Originally purchased by the wealthy to invest broadly in a multitude of stocks, bonds and other assets, they became massively popular in the late 1980’s as the stock market took off (the Dow Jones Industrial Average was 772 when Ronald Reagan became President in 1981) and the proliferation of 401(k) plans in place of employer defined benefit plans.  Problem now is there are over 20,000 different funds today, when there were about 400 in 1980.   So, first, you must do your homework.  There are NO hot tips in mutual funds.

To start your research, first check your financial standings right now: what do you own and what do you owe?  How much money do you have in the bank, liquid,  ready to meet emergencies?  And how much money do you have to lose?  I say lose, because investments in mutual funds (and for that matter all investments) do NOT have  guarantees, so you can lose your money. Second, how will you invest, in a lump sum or on a monthly basis?

If you have a lump sum, is it retirement money (IRA, etc.) or is after tax money (like you have in your checking account)?  How much is it?  Then do a risk tolerance questionnaire available on most mutual fund and discount brokerage firm’s websites and see how aggressive or conservative you are. Also, do you have any social objections to investing in any particular company or industry (such as tobacco)?  From there you should have some generic idea to put X% in stocks, Y% in bonds and Z% in cash.  Then you select mutual funds to fit this allocation.  

You can have a registered representative of a broker/dealer sell you some funds and they will have sales charges (called loads) in them to pay to sell them to you.  Or you can call a registered representative at a “no load” mutual fund company and they will sell you funds that do not have loads (but don’t think it’s free, it’s not, and it’s not necessarily cheaper ).  Or you can do you own homework using research tools such as Morningstar and select some funds and then call a discount brokerage firm and set up an account and tell the registered representative on the phone (or over the web) to purchase so much as each fund you wish to buy.  

Regardless of where you buy your funds, you need to do your homework and watch for expenses, how often the fund sells everything  (call the turnover ratio) and other things, so there is no short cut for this.  It’s your money, know what you are doing with it or if you have someone else selling things to you, know what you are buying.  Caveat Emptor!

Chris Cooper is the owner and founder of Chris Cooper & Company, Inc., a fee-only financial planning firm for elderly persons and the owner and founder of ElderCare Advocates, Inc. a private geriatric care management and long term care consulting firm. As a California Licensed Professional Fiduciary, Chris can serve as  Conservator of the Person and Estate under court appointment,  as Agent under a Durable Power of Attorney for Financial matters and Health Care matters.

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