Investing your money is always a good idea. But what kind of investment is best for you? If you follow the business news you see that fortunes can be made (and lost) in cryptocurrencies, risky stocks, and other investments. A basic problem for the average person is that they have neither the time nor the experience needed to profit from swings in the stock market or other investing arenas. Thus many investors opt for ways to invest where someone with the time and expertise will manage their money. One of these ways is to put your money in a mutual fund. Is this a good idea?
Why Put Your Money in a Mutual Fund?
The advantages of using a mutual fund to invest are that you are able to diversify through the fund and not just be investing in a single stock, piece of property, or bond. You are getting professional management of your money by someone with the expertise and time to handle investments. You are able to invest smaller amounts that are often required for buying a single stock. And you are able to invest and withdraw funds in small amounts and conveniently.
Mutual Funds for Small Investors
A problem for small investors that occurs when they watch the business news is that many lucrative investments require much more capital than the average mom and pop investor has. Thus, a small investor tends to get a lower rate of return than the big guys but also does not need to devote their time or learn more about investing than simply where to send their money every month!
Alternatives to Mutual Funds
A recent Bloomberg article about where to invest a million dollars reminded us of the dilemma faced by a small investor. While a mom and pop investor can invest money in a mutual fund they can also put money in an ETF or exchange traded fund that tracks the S&P 500 which has doubled in value over just the past five years. The argument can be made that using a professional to make investment choices for you is better than simply using an index but, in fact, there are years when an ETF that tracks the S & P 500 will outperform most managed funds!
How to Invest in Your Mutual Fund
Investments in the US stock market outperform most other investments over the years. However, the market and even funds full of stocks tend to have good and bad years. A good way to avoid investing too much just before a market crash and an equally good way to pick up bargains after a crash is to use an approach called dollar cost averaging. With dollar cost averaging you decide how often you will invest. This can be every paycheck, month, quarter, or year. Then you pick an amount that you invest each time and you stick with it over the years. Over the years your invested funds will earn and increase your investment and this will get better with each year. Because you are not timing the market (because you lack the skill and time), you will avoid losing money by pouring money into the market before a crash and will pick up bargains when it has just crashed.
Choosing a Mutual Fund
When choosing a mutual fund look at management fees, performance of the fund, and how easy it will be to deposit money when you choose and withdraw money when you need it. Because you should be interested in results over the long term look at least five- and ten-year performance instead of just the last months or year!