How to pick your first mutual fund

re: How to pick your first mutual fund

Reva — Fri, 10 Jul 2009 14:31:22 GMT

Not everyone can afford to invest AND be properly diversified in individual stocks. And diversification is one of the key elements of a good portfolio. Index funds are known to be good investments and 401K's are not particularly known to have great choices. I advise your cousin to learn all she can about investing from easy to understand sites like CNN Money 101. There are several more sites like it. Once she starts learning, she'll no longer be intimidated. Then she can use the power of the internet to research funds and stocks to find what best fits her investment goals. I also would hope that she eventually opens an IRA so that all her eggs are not in one basket.

She's young enough that she can learn how to invest, weather market storms and hopefully retire a millionaire due to regular investing and the magic of compounding. Also, encourage her to do three more things:

1. Start an emergency savings fund (ultimate goal at least 12 months net income) separate from investments so she doesn't have to tap into her investments and pay steep penalties for doing so.

2. Establish and maintain a good credit history because not doing so costs money in the long run (paying more for things, including car insurance, left out of the housing market, and even decreased employment opportunities).

3. BUT...Stay as debt free as humanly possible. Now is not the time to carry debt, so only charge what can be paid in full each month. Cards with rewards can actually put money into her pockets so she'll have even more to save and invest, as long as she does not pay interest and fees. May you both live long and prosper.

re: How to pick your first mutual fund

Padraic Heneghan — Mon, 22 Jun 2009 02:05:52 GMT

I totally agree with the idea of investing in index funds for those that do not have the time or inclination to research their investing strategy. But for most of us there is so much at stake so I would encourage everyone to make the time. There are so many conflicts of interest and hidden fees in the mutual fund industry we should all take the time to figure this out. My preference is investing in the individual stocks that the best mutual funds are accumulating but I know this is not for everyone. For me it is the only way to avoid excessive mutual fund fees but still get an adequate level of diversification.

re: How to pick your first mutual fund

RetirementwithaPlan.wordpress.com — Sun, 29 Mar 2009 12:50:42 GMT

Why do we always want to lead new investors down the path of the least resistance? Yes, buying your first fund is like a first date. But no second date ever occurred until there was at least some familiarity with who (or in the case of investing, what) you were dating. You will spend that first meeting getting impressions and feedback, reactions and input and in the end, you will rely on your feelings. Setting poor Susie towards an index fund or worse, a target-dated fund, gives her the impression that this is easy. This is point and push investing. Nothing to it!

But as every investor in America now knows, there is more to it. Every investor in America is questioning those first impressions, their initial reactions to investing and those wonderful feelings that an ever-rising stock market gives. All questions that they should have asked on the "first date".

Index funds are too tax efficient to be used by 401(k) investors, especially newer, younger ones. Target-dated funds are still unproven (yet well-touted and grossly oversold) investments that, yes, offer fund of funds opportunity (if you consider that companies like Fidelity group large numbers of underperforming funds into one fund and call it well-balanced for future growth or something like that).

You could have done Susie a greater service by looking at a basket of funds that offer her a little of everything. Some aggressiveness at her age is an absolute necessity. Some growth and some value as well as something like a bond fund would make up a decent beginning investor portfolio.

Then talk to her about the perils that may lay ahead and how these are often overlooked when markets recover - and they will - and the value of dollar cost averaging even when they are not doing well.

Her employer is extremely generous offering a 100% match up to 6% and if they still are, she is working for one of the few businesses that haven't cut those matching contributions. And even they had, did you tell her that she should still be putting at least 5% away? And why.

Investing for the first time is like that first date. Is it surprising that we keep trying? Not really. But a spurned investor isn't as resilient as a spurned dater. Loneliness and the need for company and companionship pull daters back into the date. BUt investors who have had a bad experience, tend to never go back or worse, go back conservatively.