Investing 101: Mutual funds |

Investing 101: Mutual funds

Nancy Gardner
Special to the Daily |

OK, I have a confession to make. When I started writing my Financial Pathways column a year ago, it was my intent to put off tackling investments — and I did. It is more complex and involved than my topics to date, and I wanted to build a foundation first. It is finally time to move on to this important area of financial planning.

Previously I explained short-term savings and emergency funds. Short-term savings are for goals such as a special vacation, a new car or a down payment on a home. Emergency funds are just what they imply — funds set aside for an unexpected expense such as your car needing repairs. Cash can be routinely accumulated in a savings account at your bank to meet these goals.

Long-term savings are used for college education, retirement and possibly a second home. Lately, I have also been including weddings for children. The national average cost for weddings is now $30,000. This is a basic wedding without niceties such as expensive entrées or an open bar. Multiple that by two or more daughters plus inflation and you have major expenses looming. As for the cost of college, a moderate in-state, public college nationally averaged $24,610 for the 2016-17 academic year. Retirement, of course, is the ultimate expense. Having enough to live on throughout retirement, regardless of how long you live, is challenging. We will spend more time on retirement planning after addressing investments.

In order to have enough saved for your long-term goals, regardless of what they are, you will need your money to work hard for you in investments that not only grow to meet today’s costs but to also cover inflation for the years while you are saving. The best investments are stocks and bonds or mutual funds. Today we will discuss mutual funds.

In order to have enough saved for your long-term goals, regardless of what they are, you will need your money to work hard for you in investments that not only grow to meet today’s costs but to also cover inflation for the years while you are saving.

Mutual funds provide the easiest way to invest. You can invest in them in a 401k, an IRA, a SEP, a 529 College Savings Account or a brokerage account. The choices can be extensive or limited, depending on the vehicle. Each fund has its own manager, and once you do your due diligence and choose your funds, you don’t have to oversee them on a daily basis. Do at least check your statements on a monthly basis and compare values of each fund against its last month’s performance. If one or more has gone down substantially, determine why. This is your money and you are ultimately responsible for the outcome.

So what is a mutual fund? A mutual fund is made up of investments in many different companies that are mostly publicly traded. There could be as few as 50 companies, but usually there are several hundred to more than 1,000. Investment companies sell shares to their mutual fund and in doing so, an investor is buying an interest in all the companies in the fund, however small it might be. A good analogy is a pie made with many ingredients and and you are buying a slice of that pie. It would be very expensive to buy shares of each company directly but through mutual funds you can invest in each of them at a much lower cost. There are fees associated with investing in a mutual fund and they are important to review. Always choose no-load funds to minimize expenses. Other things to consider:

1) Each mutual fund has an objective in that it is investing in stocks or bonds, in small, medium or large companies, growth or value, in the United States or Internationally, or in a sector such as oil, technology or real estate. Diversify by choosing funds with different objectives.

2) There are many funds in each category. To choose the most desirable funds, check their performance or returns against each other in the same category for one-, three-, five- and 10-year periods. Also determine how long the fund manager has been with the fund — is he/she responsible for the fund’s success?

3) Combine stock and bond funds in your portfolio to minimize risk.

4) Remember that mutual fund investment styles and objectives are cyclical. For example, in one year oil and gas funds may have the best returns and the next year technology may be leading and the oil sector has a lackluster performance. That is why it is important to diversify and pay attention to what is happening in the market.

Nancy Gardner is a Certified Financial Planner. She and her husband Bill and their dog Daisy split their time between Summit County and Montgomery County, Texas. Send questions to

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