Two primary benefits you gain by investing in a mutual fund are professional management of your money and an instantly diversified portfolio of securities. But those two factors by themselves won't necessarily make you any money, much less help you build wealth. Professional mutual fund managers don't always do a better job of picking stocks than you could on your own. According to the Huffington Post, 84 percent of actively managed mutual funds did worse than the Standard & Poor's averages in 2011. If you want to build wealth with mutual funds, though, you need to have a plan.
Start early and invest consistently. While there are few guarantees in the investments world, one factor stands in stark contrast to the others: the sooner you start investing, the greater your potential for building wealth. You don't have to invest a fortune. Small amounts invested regularly will do the trick. For example, if you started investing $100 per month in a mutual fund that returned 8 percent when you were 22 years old, continued your monthly investments for the next ten years then stopped, by the time you turn 64 you'll have $234,600 in your investment account. If you wait until you turn 32 to start investing, you could invest that same $100 per month at 8 percent and continue investing monthly until you reached age 64 and never catch up. At 64 you would only have $177,400 in your account.
Divide your investments based on your long-term, intermediate-term and short-term needs. A superstar athlete might sign a multimillion-dollar contract right out of college, but for most of us mere mortals, building wealth doesn't happen overnight. It takes years. While you need to have a long-term mindset, you still have to live in the present and deal with your short and intermediate-term needs and goals. Don't invest money you need for your short-term needs in a long-term mutual fund that you're using to build wealth. Keep some of your funds in a readily available account, such as a bank checking account or a money market mutual fund. This will keep you from having to tap your long-term mutual fund investments when you have immediate needs.
Diversify your mutual fund investments. When you buy a mutual fund you get a diversified portfolio of securities within the scope of the fund's investment objective. You can gain an even greater degree of diversification by spreading your investment dollars among several different mutual funds that invest in different economic sectors or geographical areas. For example, the U.S. economy might be struggling while international stocks are soaring. Companies in the energy sector might post record gains while companies in the transportation sector suffer. Having mutual fund investments with a variety of objectives across a number of sectors might help protect your gains and offset your losses.
Stay involved with your investments for the long haul. Stocks go up and stocks go down, but the general trend for the stock market, when measure over long periods of time such as 10 to 15 years, has been consistently upward. Investors who are willing to ride out the bad times with a buy-and-hold philosophy tend to earn strong, positive returns. Consider index-funds for your long-term mutual fund investments. Rather than attempting to beat the market, index-funds attempt to match a particular index by creating a portfolio that mimics the index. These funds require little management, so they tend not to generate as many fees as actively managed funds; and, since their portfolios mirror the index, their results tend to come close to matching the index.
- CNN Money: 10 Rules For Building Wealth
- Investor.gov: Stocks
- Huffington Post: Stock Market: 84 Percent Of Stock Funds Underperformed In 2011, Reaching Decade Lows
- Wall Street Journal: You Don't Have to Start Off Rich to Build Wealth
- Federal Reserve Bank of Dallas: Building Wealth
- CNN Money: 10 Rules For Building Wealth
- CNN Money: Mutual Funds: Are You Really Diversified?
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.