Mutual Funds: Sometimes, Boring Is a Good Thing!
Mutual Funds (sometimes) get a bad wrap. They're not as "exciting" as owning shares of your favorite company or as thrilling to watch as the latest meme stock. But think about…what type of investments are typically in your workplace retirement account(s)? You got it! Mutual Funds. In short, mutual funds may serve as a wonderful "foundational" investment option when building investment assets, offering many benefits.
Diversification
Investment companies manage mutual funds that raise money from new and existing shareholders to invest in securities (e.g., stocks, bonds, options, futures, currencies, or money market securities). Each fund represents a diversified portfolio of stocks and/or bonds, often numbering at least 100 securities. As share prices of some of the securities in the fund drop, others may remain stable or even rise, thus spreading out the risk and lessening the impact of a loss on the fund's net asset value (NAV), typically the current price for one unit of a fund.
Remember: as a shareholder, you share equally in both the gains and losses generated by the overall fund.
One might also seek diversification by owning shares in several different mutual funds with different investment objectives. For many savers, investment objectives can be boiled down to:
I want growth
I want income
I want safety
I want a combination of all the above
Growth, also known as appreciation, may offer both the greatest risk and the greatest potential return, whereas safety attempts to prevent or minimize losses in a portfolio. Coordinating the two, again, is form a diversification and risk management.
Another way to classify mutuals funds is asset class (e.g., stocks, bonds, or other investment options). Class can also be broken down into categories such as a balanced fund representing a combination of stocks and bonds or a fund specializing in specific industries—for example, technology or health care—called sector funds. Further, those buying mostly stocks and/or bonds offered by foreign companies or governments are called international or global funds.
Professional Management
Mutual fund holdings are managed by portfolio managers and analysts specializing in certain types of securities. Together, they decide what and when to buy, hold, and sell various securities. These (sometimes frequent) decisions are made with both the individual security and overall portfolio in mind.
A fund's performance is usually judged by comparing its return with a selected average or best-fit index over the same period. Well-known averages and benchmarks include the Dow Jones Industrial Average (30 U.S. industrial stocks) and the Standard and Poor's 500 Stock Index (500 of the largest U.S. companies).
Maintaining the Right Mix
Having that built-in diversification is a plus when investing in mutual funds. And professional management could save you countless hours scanning the news feeds and reviewing financial statements, trying to analyze companies, and spot trends. In fact, many investors find it very difficult to build and manage a portfolio of individual securities on their own. However, again, before choosing funds, clarify your investment objectives both in time and amount. Understand what your investment time horizon is, how much you can save, and your end goal.
As your financial professional, we can help you determine your risk tolerance and select investments best suited to your particular needs.
Once we have chosen the right mix of funds, we will review and possibly rebalance your portfolio at least annually, noting any significant gains in one area of your holdings that could throw your portfolio out of balance.
Be advised, life changes, such as an inheritance or job loss, may also dramatically affect the level of risk you are willing to take. Investment returns and principal value of investments may fluctuate, and your shares, when redeemed, may be worth more or less than their original cost. Therefore, a well-designed and maintained mutual fund portfolio can help provide a solid foundation for your financial future.
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