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Getting
Started in Mutual Funds
A Primer on Investing
Now
that State Farm has started selling mutual funds, I get a
lot of questions about investing. Many of the people I talk
to have never invested in the stock or bond markets before.
Some feel they can't afford to invest, other are concerned
about the risk and others simply haven't had time to sit down
and get started.
These
are the "real people" behind the statistics that
show, according to research by the Investment Company Institute,
that more than 50 percent of American households do not own
mutual funds. That means about half of all Americans have
not invested in the stock and bond markets. While past performance
of any stock or bond is not an indication of future results,
those securities have historically, over the long term, produced
a greater return on investments.
Market
Basket Approach
For people who have not invested in stocks or bonds before,
mutual funds provide a good point of entry into the financial
markets. As I often explain, a basic mutual fund pools the
investment of many people to purchase a group of securities
selected by a professional manager. It's a market basket approach
that allows everyone who owns a share of the basket to benefit
from all groceries inside.
Mutual
funds offer a couple of advantages for the first time investor.
You don't need to invest a lot of money - sometimes as little
as $250 for an initial investment - to get started, and with
the way most funds are put together you automatically own
a diverse group of stocks or bonds or a combination of the
tow. Most financial professionals agree that diversity is
a key to smart investing because it allows you to spread your
investment over a number of economic sectors.
Your
Risk Tolerance
The important thing in approaching any investment is to sit
down with someone you trust to discuss investing. Your comfort
level is really the most critical factor. You and your financial
professional should discuss your investment goals. I recommend
setting long-term goals because mutual funds are a long-term
investment with many people investing to save money for college
or retirement. Staying focused on a clear, long-term goal
will help you weather the ups and downs the market will experience.
Yes, the
markets will fluctuate. That's a certainty. So one of the
first things you need to do is discuss how you feel about
risk, since mutual funds are not federally insured and may
go down in value. You'll need to look at your own personal
tolerance for risk and how much risk you're willing to accept
in the market. Investing can be a bumpy ride, although, historically,
it has worked to the benefit of investors who have hung on
for the long term. But some investments are more conservative
than others and it's important you purchase the type of fund
that matches your comfort level.
Dollar
Cost Averaging
Once you've considered goals and risks, it helps to set up
an investment strategy. You might think about investing the
same amount of money in your fund on a monthly or quarterly
basis, a strategy called "dollar cost averaging."
Again, there are a couple of things to keep in mind with this
approach. First, you'll be subject to the ups and downs of
the market as you would with any investment strategy. Dollar-cost
averaging does not assure a profit or protect you against
a loss in declining markets. Because such plans involve making
continuous investments regardless of fluctuating share process,
you need to consider if you'll be able to continue to invest
on a steady basis when the market is down. However, experts
think "dollar cost averaging" is a smart strategy
because it allows you to average the cost of the shares you
own.
Finally,
think of your mutual funds as a commitment. They're not something
you'll track every day in the newspaper or a financial network.
Remember, you're investing for college or retirement, both
of which are probably some years away. A long-range outlook
will also help you feel better when you hit those inevitable
bumps along the road.
Investing
in mutual funds is within the reach of many people who have
never before considered themselves investors. The key is coming
up with a strategy that you are comfortable with. There is
no assurance that the funds will achieve their investment
objectives. Investment return and principal value will fluctuate
and fund shares, when redeemed, may be worth more or less
than their original cost.
About
the Author: Bob DeGraaf is a registered State Farm Agent.
Note: State Farm Mutual Funds are not insurance products and
are offered by State Farm VP Management corp. For more complete
information call 1-800-447-4930.
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