Why a Mutual Fund Makes More Cents

When I first started my career back during the turn of the millennium, I was a little concerned. I asked myself (in fact, I prayed about it) whether or not I was capable of managing others’ money including, but not limited to, retirement accounts, college savings plans and insurance ‘“ life, long-term care, and disability. Wow! That’s a lot to be responsible for and is quite often stressful when I examine how much trust my clients have put in me. If it weren’t for some great training, a good support staff and some serious passion on my part to do my part and take part in the party of financial planning, I could have easily watched my tenure expire years ago.

But the glue that holds the financial relationship between me and my clientele is not necessarily the service that most advisors, including me, tout (although service is fundamental). It isn’t the crafty marketing campaigns big firms take so much pride in (although that does build a strong brand name). What I find most every investor believing, but rarely ever expressing, is that the performance of one’s investments is the primary reason for the investment.

Now many of us want to feel good about our investment. By ‘œfeel good’ I mean that we don’t want our money going to a business or a cause in which we disagree. But we still want to make money, which is why financial advisors try to find the best performing Socially Responsible Investment (SRI) that is in accordance with their client’s investor profile. Several other investors want to push a movement such as the refusal to invest in oil stocks to protest the war. This could still be seen as an SRI, but with a more specific intention. But the reason anyone really considers an investment in the first place ‘“ actually making the decision to invest ‘“ is to make money.

If getting your start you start to falter and don’t have the credit to start a mortgage or the commitment to start a business, talk to a financial advisor about the advantages of a mutual fund.

The Logistics

In order to understand a mutual fund, allow me to give you a brief explanation of that which makes up a mutual fund.

Mutual funds consist of stocks and bonds (and sometimes cash, but you should already know what that is). A stock is simply ownership in a corporation; a bond represents debt. When one wants appreciation or growth in an investment, one typically buys stock (hoping his/her broker will make the right decisions of when to buy and sell). When one wants income from an investment, one typically buys bonds (because they are typically safer with interest paid on principal). We’ve all heard the term, ‘œdon’t put all your eggs in one basket.’ I think by now we should all agree that the statement carries a strong sense of logic. So how do I determine which basket to put what eggs in? Pooling investor dollars together with a common objective is a form of insurance against risk. Think about your car or health insurance. It would be awfully expensive to fix your car by yourself if you weren’t saving for an accident. But insurance companies figured out that if they get a bunch of people to put their money together and invest it while paying out when an accident occurs, it makes financial sense.

A mutual fund makes more sense in that it has five major advantages over investing in stock and/or bonds and you don’t need a credit score, a monthly commitment or a degree to get it off the ground. The advantages are:

1. Portfolio Management
2. Diversification
3. Convenience
4. Access to Information
5. Automatic Reinvestment

Portfolio management

Because mutual funds are pools of investor dollars with the common objective (e.g. aggressive growth, income, or capital preservation), they typically defer risk while performing (historically) well enough to hedge inflation and provide enough to satisfy long-term goals of retirement (and nowadays, college). The reason this usually happens when people stick to their investment objective (again, no guarantees) is because of the portfolio manager. He or she bases an experienced decision on a number of factors and is paid on a percentage basis of said fund. It is his or her incentive (as well as the financial advisors) to grow the fund with minimal decline. The income of both the manager and advisor is tied to the fund performance. You can bet they want you to have more!

Diversification

Most mutual funds invest in between 50 and 150 different stocks, bonds and a combination of both. If one of the companies in the fund happens to be the next Enron, you can see how the balance of your fund shouldn’t be thrown off too heavily. There are typically over 100 other companies in the fund carrying their own weight and the portfolio manager often has the call to throw certain holdings out of the fund.

Convenience

Because a fund may have over 100 investments within, it would be quite burdensome to receive over 100 statements on a regular basis. With one quick and easy to read statement, a mutual fund’s performance is delivered to your door each quarter (and sometimes, more frequently).

Access to Information

Should you need to check out the value of your mutual fund you can go online, look up the day-end performance in the Wall Street Journal or your advisor should be calling you to service the account. Markets fluctuate and prices go up and down. Because the mutual fund is valued at the day’s end, there is only one value priced daily.

For your sanity and that of your advisors, DO NOT CHECK THIS VALUE EVERY DAY!!!

Automatic Reinvestment

Albert Einstein stated that the most powerful force in the world is compound interest. Money makes money and the money that that money makes makes more money and you cannot make money the way your money can make money for you. Like a snowball at the top of a hill, any gains in your mutual fund can be used to purchase more shares of that mutual fund (or another in your portfolio), making the compounding of your value realized.

For most funds I have worked with, a minimum of $250 is sufficient and most will help you get you on your way for as little as $50 a month. Mutual funds can be placed in an IRA or used for short-term goals. Talk with an advisor to determine if and which mutual funds are best for you and your financial needs.

A mutual fund makes more sense. While no mutual fund is guaranteed and past performance is not indicative of future results, I typically recommend mutual funds to my clients because of these five advantages a mutual fund has over investing in individual stock and/or bonds.

Advantage: You!