Everyone who follows the financial news has heard of mutual funds and knows the stock market has risen steadily for almost 20 years. In fact, by most measures, the stock market has made more people more money, and done it more reliably, than any other investment over the past 75 years! If you want to accumulate substantial wealth, you must include stocks in your investments!
But, most people who “invest” don’t study the market. They don’t understand it, and they don’t have time to manage their portfolio wisely. That’s where mutual funds come in. I respect that other people have other opinions, and certainly not all mutual funds are well managed – you MUST choose wisely and use appropriate caution! But, for most folks, a good, solid, boring mutual fund is the golden path to riches.
Here are my Top 10 reasons to invest in mutual funds:
- Selection. You can select from thousands of funds (you’ll find one to suit your needs) and you can get information on them easily. Magazines like “Money” are easy to find. Most credit unions have information, and your local library is a goldmine – and there’s the Internet.
- Start Small. Most mutual funds will let you start with less than $1000, and if you set it up for automatic deposits, some will let you start with only $50. I’ve spent more than that in a restaurant!
- Simplicity. You deposit 10% of your income every month. Just pay yourself first, then pay the mortgage, then pay everyone else.
- Professional management. I don’t always have time to research, select, and monitor individual stocks. So, I pay a professional a small fee to do it for me. A good fund manager will make you rich!
- Compound interest. Depending on what index you pick, the U.S. stock market has gone up an average of over 12% per year for the past 10 years, and it’s been almost that high for the past 20 years. The market fluctuates, but the beauty of this is, you don’t care!
Over 10, 20, or 30 years, the system works!
- Dollar-cost-averaging. The details are complicated, but by investing every single month, whether the market is up or down, you get a tremendous boost from the mathematics. Your “average cost” will always be less than the “average price” you paid! And that is money in your pocket!
- Diversification. A broad-based growth fund typically invests in dozens of companies in different industries, sometimes even in different countries around the world. If one stock goes down, hopefully dozens of others will go up. There is excellent protection and sound risk management built-in to these funds.
- Specialization. If you prefer, and if you do the research, there are funds that invest in only a very small number of companies. If you can accept the additional risk, you can invest in one particular industry, or one country, or in companies with certain management styles. This creates the potential for even greater profits if you select the right industry, but be aware it also brings greater potential risk.
- Fund “Families”. Most mutual funds are offered by management companies that sponsor several different funds, with different objectives. They make it easy to move your money between funds, so as your goals change, you can adjust your investments with a quick phone call, or on the Internet.
- Momentum. Once you get started, your enthusiasm builds. Once you have money “in the market”, you’ll track it, manage it, and in all probability, your desire to save will increase. If you’ve had difficulty saving in the past…start! Those monthly statements will be positive reminders to do even more.
There are risks and there can be costs to investing in mutual funds, so be sure you read the prospectus and understand the details before you invest. The stock market does fluctuate, and I strongly advise you to read several books and consult with a professional if this is all new for you. But get started! For almost everyone, regular deposits to a long-term growth mutual fund is the sure, simple and reliable way to get rich! But you must: start!