Mutual funds are great for beginners. Why do I think this?
- They allow one to get in on the action of stocks, bonds and real estate without having to know a ton.
- Risk is limited by the fact that they are diversified. Funds hold a portfolio of assets. If one goes down there are plenty of others that can go up
- You have professional money manager or indexes that do the work for you
- You get to play the market with limited risk.
- Stocks in general go up
- There are many types of funds focusing on the broad market, growth, real estate, certain sectors or countries
- You can get started with very little money, usually $2500 to open an account
- They allow one to sit back and ride it out so good for long-term investments
Are there downsides? Sure as with any investment
- There is a management fee. The fund manager in active funds takes a fee of usually around 0.4% to 0.8% of your fund. If they make 10% you can give them 0.5%. Index funds have lower management fees.
- The value could do down in the short-run. In the long run they will make money.
- Index funds have lower fees as there is no management team so the fees may be around 0.3%. These track an index like the SP 500 or Russell 2000. You get what the index gets. There is no genius stock picker or guy with inside information picking the stocks.
- Risks with index funds: The index is weighted toward stocks that are a bigger component of the index like say Amazon, Apple, Google and Netflix.
- You are playing the whole market not just a portfolio of stocks the fund managing team thinks is good
- Over the log run index funds are quite good. Index funds have beaten active funds over the last few years as the market has gone up driven mainly by tech. This could change if the economy goes south and active pickers have can find opportunities
Over all I recommend mutual funds with the following characteristics
- No load/fee to buy in and out. If you buy say Fidelity brand funds through Fidelity there is no fee.
- SP 500 index
- Russell 2000 index for broad market
- Large cap growth actively managed
- International large cap fund actively managed fund for diversification from the USA
There are other types of mutual funds too
- Bond funds
- Hybrid funds (stock/bond mix)
- Real Estate funds
- International funds
- Country specific
- Emerging markets
- Technology focussed