Mutual Funds An Investment

At their most basic, mutual funds are an investment.

"Tell me something I don't know; I'm not that dumb," you say.

I know that, but please bear with me. I don't want to make the mistake that I see so many investment writers (and financial advisors) make: starting with the more advanced stuff on the assumption that you know the basics. So often I hear from people reading about mutual funds and complaining that a writer starts throwing around terms such as "small cap value stock fund" and "asset allocation" without explaining them, and before you know it, you're lost in the weeds and frustrated. You have every right to be.

ëIf you already understand what stocks and bonds are, their risks and potential returns, terrific. You can skip this chapter. Most people, however, don't really understand the basics of investments, and that's one of the major reasons that people make investment mistakes in the first place. If you understand the specific types of securities that funds can invest in, you've mastered one of the important building blocks to understanding mutual funds.

All right, let me get more specific: A mutual fund is an investment that invests in other investments. In other words, when you invest in a mutual fund, you're contributing to a big pile of money that a mutual fund manager uses to buy other investments, such as stocks, bonds, and/or other assets that meet the fund's investment criteria.

Differences in investment criteria are how mutual funds broadly categorize themselves, analogous to the way that an automaker labels a car a "four-door sedan" or a "sport utility vehicle." This helps you, the buyer, have a general picture of the product even before you see the specifics.

On the car lot, of course, it's taken for granted that you know what "sedan" and "sport utility vehicle" mean. But what if the car salesman asks you whether you want a Pegasus or a Stegasaurus? How can you decide if you don't know what those names mean?

Mutual fund terms, such as "municipal bond fund" or "small cap stock fund," are thrown around too casually. Fact is, thanks to our spending-oriented culture, the average American knows cars a lot better than mutual funds. In this chapter and the next, I explain the investment and mutual fund terms and concepts that many writers assume you already know (or perhaps don't understand well enough themselves to explain to you).

ctfBC/?

Piecing together your financial puzzle

Many people plunge into mutual funds without first coming up with an overall financial plan. Would you start out on a long trip without picking a destination? Before you ask for directions, you have to know where you're trying to go. And you have to know what you need and want to do along the way.

Some investors leap into the task of picking a fund before they know what they want their mutual funds to do. They may choose fine funds, but they also may make big financial planning mistakes that lead them to pay far more in taxes than they need to.

If you haven't planned, you're not alone. You work hard and want to have a life; developing a financial plan may be the last thing on your mind when the weekend rolls around. But in rutunt\ ears, too 111.1117 people lnw luund out the hard way that recessions and natural disasters aren't just bad things that happen to other people You need ¡1 sntetv net in case yuu lose your job or are hit with unexpected expenses This s.ituly nut needs to be moisted in something tli;il you '„an bull quickly; something whu'ap value you can lount on to not drop at mronvHiiiun1 moments isi.1» Uhdptei 71

A great (I(Ml ul '.-.'kit's i-.rilten about mutual funds completely i'inoios the financial planning implications jl mutual fund decision* In some cases, the writer doesn't have enough ^piiiu in go Inlu thuM: important details In utlif-i oases, ivr iters simply don't know what they're overlooking.

If you've determined vuur finjnci.il needs and rju.iis already tunlic1 Understanding yoursell is a qood pari nf the battle But don't shortchange yourself by diving in before you put on your mask and flippers. Be sure to dress for investing surr.>ss< And be sure to read Chapter 3.

Financial Abundance Strategy

Financial Abundance Strategy

Whose Fault When You’re Lack Of Financial Abundance? This Book Is One Of The Most Valuable Resources In The World For The Financial Abundance Strategies.

Get My Free Ebook


Post a comment