Key Takeaways
- One way to invest your money is through mutual funds.
- Mutual funds can be actively managed or passively managed.
- You’ll want to invest for no less than five years if you invest in a mutual fund.
Perhaps you’ve noticed all the news about investments over the past couple of years, with the markets going up and down and people making tons of money with cryptocurrency, GameStop stock, and so on. You may have a little extra money and be thinking you’d like to get in on the action, but aren’t sure where to start. Well, one way to do it is to purchase mutual funds. If you don’t know what those are, let’s take a look into them here.
It wasn’t too long ago that you called a stockbroker when you wanted to buy stock. That’s how it was done, and you had to have a good amount of money to do this.
Over time, though, the industry recognized that there were people who still wanted to invest but might only have $500 to $1,000 to start with. You can’t really buy a stock very easily with that amount, so this is how mutual funds were born. They started to become popular in the 1980s, and there are almost 8,000 mutual funds right now. Mutual funds come in two “flavors”: actively managed and passively managed.
Actively managed mutual funds have a money manager (or a team of money managers) working for an investment company. The money manager selects stocks or bonds to try to get a return commensurate with the stock market or bond market. They try to beat the market, if they can, by their superior skills of selecting the right stocks to hold, the right stocks to sell, and the right stocks to buy.
If you just want to get into the market and not work with a money manager, there are passively managed mutual funds. You can buy what’s called an index. The most popular index in the marketplace is the S&P 500, which has the 500 largest stocks currently in the U.S. stock market. There are also foreign stock markets and small stock markets – there are many different kinds of markets and, as a result, there are many different indexes that get automatically picked up in passively managed mutual funds. No one is managing these, so you basically get a little piece of every current stock that’s in the index that you own. It’s capital weighted, which means you own more of the big stocks and fewer of the little ones.
The trend these past ten years has been to invest more with passively managed mutual funds. It seems that people don’t want to deal with money managers. The goods news is that the initial investment can be just $500 – and in some cases, it can be even lower than that.
However, don’t get caught up in the frenzy of trying to get into the “next greatest thing” because mutual funds are a minimum five-year holding period investment. You don’t want to keep them for less than that because there are market risks – the market goes up and down. If you recall, back during the great recession, which started towards the end of 2007, the stock market didn’t recover for six and a half years. This means it could be quite a while before you make some money if you invest at the wrong time. That’s a whole other discussion and blog post, but it’s important to note.
So, that’s a little about mutual funds. There’s certainly a lot more information about them online. If you’re interested, take some time to look that up and learn what you’re getting into before you put your money to work. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy:
The Basics of the Stock Market
