Mutual Funds

Mutual funds are probably the single most important traded commodity on the stock market.  Mutual funds are nothing more than a selection of stocks, bonds, futures, currency, or pretty much anything else openly traded that are contained within a trust that is managed by an oversight organization.  Shares of the fund are then sold just like any other stock to anyone who wishes to purchase them.  Due to the way that the fund is managed they tend to follow more closely the growth or decay of the section of the market that they are diversified into.  This allows for a much more predictable future than purchasing an individual stock and lends itself to a more secure investment.

The largest advantage to purchasing shares of a mutual fund is that the fund by it's very nature is already diversified into hundreds or even thousands of different companies, bonds, or whatever else the fund purchases.  This means that it is possible to have an extremely diversified portfolio with only a couple of different funds.  This and the inherent safety of a fund are the main reasons that your 401K typically only allows the purchase of mutual funds.

Even though mutual funds are already diversified it is still a good idea to invest in several mutual funds.  I like to choose three or four funds to put my money into.  I think it is a good idea to have at least one fund from each of three categories low risk low yield, medium risk medium yield, and high risk high yield.  The percentage of your investment that is placed in to each fund will be determined primarily by the length of time that you have until you need the money (typically retirement).  It is best to have a larger percentage in high risk when you are young and shift that money into a lower risk as you grow older and closer to retirement.

I personally like Vanguard funds and they have a fund to meet most any investment requirement.  Since I am young I tend to have more of my money in real-estate funds and overseas funds as they tend to have a higher yield but also a higher risk.  I will go more in depth into risk and yield in a later post about those topics.

Thats all for now

CoffieGuy