02-01-2016 09:10 AM
Content provided courtesy of USAA.
If you're interested in investing but are concerned that you lack the skills to go it alone, mutual funds could be a solid choice.
That's because there's power — and often safety — in numbers, says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ professional at USAA. A mutual fund pools money from a group of individuals who invest in the fund. A professional fund manager invests the money, choosing which stocks, bonds or other securities to buy. Because a fund typically owns many investments, the risk associated with owning any particular security can be reduced. Mutual funds charge fees to cover operating costs, including paying its managers.
Fund managers use their expertise to invest your money, which relieves you from trying to pick out individual securities and determining when to buy and sell. All you have to do is pick the fund and make your investment.
"Mutual funds let you hand over the day-to-day investment decisions to a professional," Montanaro says. "That way you can focus on the things you should be doing for your financial well-being, like saving and creating a budget."
A financial advisor at USAA or another mutual fund company can help you get started. All mutual funds are different, though, so it's worth keeping these things in mind:
- Don't assume you're diversified. Just because you invested in several mutual funds doesn't mean you have a diversified investment portfolio, Montanaro says. If you're not careful, you could end up with different funds invested in the same companies. To avoid putting all your eggs in one basket, select funds with different objectives.
- Look long term. It's wise to research how funds you're considering have performed in the past. However, a strong past performance doesn't guarantee a particular fund won't experience an "off-year." For a clearer picture, it's best to consider a fund's performance over five or 10 years.
- Compare fees among funds. Just as funds' investments vary, so do the fees they charge. Shop around to make sure you aren't overpaying. "There's no way to know how a fund is going to perform in the future, but you can understand how much it's going to cost," Montanaro says.
- Compare apples to apples. If you compare a mutual fund's performance using a benchmark index, such as the Dow Jones industrial average1 or the Standard & Poor's 500,2 make sure the fund is actually invested in the kind of companies that make up that particular index. Otherwise, you'll end up with a skewed comparison.