Mutual Funds, Index Funds, Bonds, High-Interest Savings, Front-loaded fees, Back-loaded fees, 12b-1, General investing these are most likely the terms that are whizzing through your head as you try to make sense of investing on your own. Dont worry! Its not as complicated as it sounds!
Im sure that you all have heard of the company 401(k) or a 403(b). These, as well as many other funds, are typically labeled as mutual funds. A mutual fund is a collection of money from various investors and is invested in stocks, bonds, or other assets. This fund allows a smaller investor to diversify their investments without drowning themselves in transaction costs by purchasing one stock at a time. Mutual funds are often a great investment, but there are many fees that you can incur if you are not careful; these are known as front-end fees and back-end fees (front-end meaning that you pay the fees when you purchase the fund, and back-end fees meaning that you pay them when you pull the money out of the fund). If you would like a more detailed description, take a look at the information provided at Investopedia.com.
How do I find out if a fund has performed well in the past? And how do I know if there are fees attached? you might ask. If you have an account with Etrade.com or MorningStar.com (which are free by the way), you can find the funds that are offered and sort them by the number of years they have been in existence, their current ranking (out of 5-stars), and the average % gain on investment they have had through the years. To steer you in the right directions, make sure you pick a fund that has been around for at least 15 years and has shown profitability within the recent years as well as in the past. You may even see an estimate on the fees associated with the fund. This will help guide you when you make your selection, but if you really want to see where your money is going, you can dig into the prospectus. The expenses and fees are typically shown on the very first page. These will be divided into 3 categories: management fees, distribution/service fees, and operating expenses. An average overall fee is typically a little over 1% of your investment. Not bad. If you would like to know more, take a look at these E*TRADE mutual fund videos. They are accessible to anyone, and are very helpful.
Index funds are very similar to mutual funds, but they are often modeled after a particular market index like the S&P 500. By doing this, they provide broad market exposure, low operating costs, and low portfolio turnover. If you would like your funds to grow along with the general index, then this would be the way to go.
You may have also heard of Hedge Funds. These often have a minimum investment amount of one million dollars, and are obviously not accessible to just anyone. These funds perform like a mutual fund, but they perform high-risk techniques such as short-selling and heavy leveraging which is not allowed by a mutual fund.
Another investment option is to purchase bonds, or perhaps a bond fund. When companies wish to raise money, they sell bonds which promise to deliver a higher value upon maturity. Most bonds from large companies are very safe, but they do not yield much. As a bond reduces class-rank (the lower the class rank, the less likely it is that the bond will be paid back) the potential gain may increase, but the risk also increases. When one purchases bonds, it is often for a security purposes. The low-risk bonds may not yield much money, but its often much more than if you would have just left your money in savings.
Lets pause a moment before we move onto the next investment types. Most people know that it is not smart to invest all of their money into one single companys stock. We know that if that company loses money, their stock will most likely go down, and we have now lost a lot of money. If we diversify our investments, it is less likely that we will encounter such a catastrophic event. So far, I have given basic instruction on many different types of funds that often have built-in diversification, which is great, but is it really diversification when you are spreading all of your money around in the stock market? I say NO! If the economy goes south, the stock market will often reflect this, even when the company may still show a profit.
So what can we invest in other than the stock market?
Property and Collectibles
Property is often a great investment, and there are many different avenues to choose from. You could purchase property just on the outskirts of a growing city in order to make a profit on the increased demand in the future. You could purchase a house or an office building and make money by renting them out! This is great if you are looking for ongoing cash flow from your investment.
Collectibles are often not thought of as an investment, but there are certain products out there that has certainly risen in value. The collectible might be a coin or stamps, or maybe even a great painting . If you have a knack for these things and are not interested in immediate cash flow, then this could be a great option for you.
Any of these options could be a great investment opportunity. Choose one that interests you and that you have confidence in. If you have doubts in your investment choice, it will be an agonizing future for you, so make sure you choose wisely and trust your decision.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.