Mutual Funds: the Long Haul

Updated: Jul 12, 2021

If you have gotten to the point in your financial life where you are out of debt and have 3 -6 months of savings set aside it is probably time to start investing for the long haul. It is always wise to get out of debt as quickly as possible. It is such a wonderful feeling to wake up and not be stressed about money. I know that it is almost impossible in today’s financial climate to not have debt at some point, but it should always be a top priority to strive to be debt-free. That means striving to pay off your cars, credit cards, student loans, and other liabilities before you invest in mutual funds. You can work on your mortgage while you invest over the years. If your financial house is in order then please, seriously consider the rest of this article.

If you are considering investing in the stock market in one way, shape, or form you've probably heard the term "mutual fund." If you are like I was, you probably have no clue as to what the term actually means in terms of financial benefits or even exactly what a mutual fund is. Hopefully, reading this will clear up a few of the details for you so that you can move on to make informed decisions about where and how to invest your money. Actually, I would recommend that you find a financial advisor to manage your IRAs, 401K's and 403B’s. You can never do what a large financial brokerage house can do. They have so much technology and have so much expertise in the area of investing your money. You are not able to compete with them with your money.

I should begin by pointing out that there are no 100% risk-free methods for investing. That being said, mutual funds have lower risks than many other investment options, which makes them an attractive purchase for those that are unsure about investing. In fact, there are mutual funds that contain many more mutual funds. Remember this, for the purpose of savings, mutual funds often have much better rates of return than the average savings account at your local bank, and the risks are minimal in this type of investment, particularly compared to other riskier ventures.

You are investing for the long haul adding money each month. That is called dollar-cost averaging and also reduces the risk if the markets take a turn for the worse. The Rate of 72 Rule states that if you divide 72 by the annual rate of interest you get an approximation of how long it will take to double your money. So, if a mutual fund is averaging a 7% annual rate of return and you divide 72 by 7 you get about 10.3 years to double your money. And that assumes that you are not adding money on a monthly basis. So, think about how much quicker you would double your money if you were adding to your Mutual Fund on a monthly basis.

So back to basics, mutual funds are, simply put, a collection of stocks and bonds that are owned by a group of people rather than one individual investor. This accomplishes a few things. First of all, it allows investors to buy in with considerably less money than it would take to purchase the same 'portfolio' on their own and it spreads the damage out among a group of people should something go wrong with the markets. In addition, because it holds multiple stocks and/or bonds or a full sector of the stock market, the risks for a complete and total loss are reduced significantly. Keep in mind however that the market will have bad days on occasion and there is little that can be done about that. Once again, you are taking a long-term approach to invest your money. Markets go up and down, but they go up more than they go down. The markets have proven to be the investment of choice over the long haul. Start investing in your twenties and keep it up until you retire. Even if you only invest a small amount each month you will be surprised how much you will have when you are ready to retire.

There are plenty of advantages and disadvantages to purchasing mutual funds. You won't find flashy swings, dips, dives, and other grand maneuvers in a typical mutual fund's performance. Most mutual funds are selected because of their stability, not for the hope of massive profits. Some mutual funds are, admittedly, more aggressive than others. It really depends on how much risk tolerance you are able to handle and how much of your investment and retirement you are willing to risk. A financial advisor will help you figure out your risk tolerance and customize a plan just for you and your family.

Diversification is one of the key ingredients of a healthy portfolio and mutual funds will help you work diversity into your portfolio. If you are young and just beginning your career and are in no real hurry for retirement, this is one of the safest and best ways to invest your money. This will lead to a comfortable retirement but is unlikely to lead to a flashy retirement, as most mutual funds do not have the high payoffs that some investors seek.

There are essentially three types of mutual funds with a few variations on each. First, there are money market funds. These funds are great for the long-term investor who has a slow and steady approach to investing and will generally be better than leaving your money in a savings account collecting interest, but there are more profitable funds to be found. Second, are the equity funds. These funds provide slow growth over time as well as some income along the way. Finally, there are the fixed income funds. The purpose of these funds is to provide a current income stream over time. They are not designed to increase in value, but they will help maintain a certain standard of living. This is great for those who have retired or investors that are extremely conservative in nature. Hopefully, this gives you an understanding of mutual funds in general and will set the foundation to learn even more about how to take control of your investment options and make these key decisions for your future and that of your family.

Remember, "Knowledge is the key to personal and financial success". You can do this!

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