Sound Investment Advice From A Financial Planner
August 24, 2010 by Arthur McCain
Filed under Stock Market
In this article, I am going to introduce mutual funds and why they are perceived by many people to be much better than stocks.
Funds are not just another investment option; they represent the best way for most people to invest in investment securities. When I was a financial planner a prospective client once asked me, “should I invest in stocks, bonds, IRAs, or mutual funds?” That question told me a lot about the lawyer asking it. He needed a financial planner, and also needed access to a good basic guide to investing as well. I explained that mutual funds were the easiest way for the average investor to invest in stocks and bonds, and that this could be done in either an IRA and/or in various other types of accounts, like in a joint account with his spouse.
Funds are expensive but most are not. Depending on the amount of money invested, most people cannot find better value for every dollar invested than they can when they invest in mutual funds. While the fund companies generate an expense for their administrative efforts, they almost always come in cheaper than investing individually through a discount broker. With most fees at 1% or less, an investor with just $10,000 to invest could only make 10 trades in 1 year at $10 each to achieve the same cost savings. This tells us that funds are owned by so many different unit holders that the collective pays a reduced fee, not the individual investor.
Equity funds invest your money in common stocks with the objective of earning higher returns or profits for investors. Risk is higher here, as the price or value of shares can fluctuate significantly. The fourth category is balanced funds, which invest in a combination of money market securities, bonds, and stocks. The objective is to provide both moderate growth and dividend income at a moderate level of risk. No guide to investing in mutual funds is complete without considering the cost of investing. You can invest through a middleman and pay as much as 5% or more in sales charges called “loads” or you can invest directly in no-load funds and avoid them. While all mutual funds charge for yearly expenses, you can pay 2% a year or more, or less than % in well chosen no-load funds.
It never hurts to do a little homework, have reasonable expectations, pay a low load, or even used index funds, have a long term outlook, and you should be okay. More than that, you should be pleased with the wealth creation process that you have put together for yourself. If you insist on taking all kinds of risk, than you should do it with only about 5% of your investable assets. Most stock analyst will agree that it is a sound financial idea to diversify your stock portfolio with some type of money market investment, such as the Principal Money Market Fund. However, few will make that recommendation to you because they do not study or analyze this type of security investment.
Commodities operate in a little different fashion than stocks. Buying a commodity means you actually own something, or in the future you will own something, whether it be so many bushels of corn, pounds of gold, or barrels of oil. You are dealing with real goods, not the performance of a company. Typically, you are buying a contract for a future buy or sell of these goods. And it is a contract you never expect to complete.
Want to find out more about a Financial Planner, then visit Arthur McCain’s site.
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