How do mutual funds work and how do I pick one?
I’d like to start investing in mutual funds, but I have no idea how they work. Could you explain about them please?
Dear Jennifer,First of all, don’t rely solely on my answer here. You should never invest in anything you don’t fully understand.
Before you do anything else, sit down with a good mutual fund broker, someone who has the heart of a teacher, who will help you find what’s best for you and your specific situation and goals.
Simply put, a mutual fund—if it’s a stock mutual fund—is a group of 90200 stocks.
If it’s a growth stock mutual fund, then it’s a group of 90200 growth stocks.
Analysts buy the stocks they think will increase in price and sell the stocks they feel will go down in price.
When the analysts buy growth stocks, it turns it into a growth stock mutual fund. If they buy bonds instead, it becomes a bond mutual fund.
Several people put money into these groups, and that’s where you get the name “mutual fund” … They’re mutually funded. These types of investments are much safer than single stock investing because your money is spread across several different stocks. Plus, you’ve got people who know what they’re doing picking the stocks. My advice would be to take a hard look at mutual funds that have been out there for 10 to 20 years and have a good track record for a long period of time. I have one that has been open since 1934, and that kind of longevity and stability gives me confidence that over time they’ll be just fine!
Dear Dave,Can you please define what are “necessities” in today’s world while trying to get out of debt and live on a budget?
Dear Matthew,Whether you’re talking about the world today or 50 years ago, necessities haven’t changed. Necessities are still food, shelter, clothing, transportation and utilities.
We’re talking about needs versus wants. The problem is that many people were never taught that there’s a difference between the two—a big difference.
Most people have enough food to eat and a decent place to live. Those are necessities. I’m not talking about eating out or having a big, fancy house. Those are wants.
Most people also have enough clothes in the closet and a way to get around town.
They may not have designer clothes or a fancy foreign sports car, but again, those are wants, not needs. Keeping the lights on and the house warm in winter and cool during the summer? Utilities are a need. But no one needs a $300 super-deluxe cable television package.
Now, there are some important wants. I want you to have life insurance to protect your family. I also want you to have a will and health insurance. I want you to have some other nice things, too, like a better car or a nicer house. There’s nothing wrong, at some point, with having a few toys or eating at a good restaurant once in a while.
But again, these things are wants, not needs.
Believe it or not, very few Americans struggle with basic necessities. Sure, there are hungry people and homeless people in America.
Those of us who have been financially blessed should want to help the less fortunate in ways that allow them to get back on their feet and start providing for themselves again.
But most folks in this country have nothing to whine about. There’s nothing wrong with having a few wants, but you should define them correctly—and never, ever put them ahead of your needs!
Dave Ramsey is America’s trusted voice on money and business. He’s authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.