My first investment was in mutual funds which is what most people invest in because the mutual fund industry is very effective at promoting its products. There is a certain sense of security knowing that everyone else is also buying mutual funds.

The problem is that for most of us we have been sold a product that does what it says but does not deliver what you need.

Yes, mutual funds do invest in the stock market.

Yes, mutual funds do diversify the risk over hundreds of stocks but

No, most mutual funds do not give you the returns you need.

Diversify and Die?

Mutual Funds will give you built in diversification. Some of them invest in entire stock market indexes, others invest into a combination of stocks and bonds, and some invest into other company mutual funds (which are called Fund of Funds, yikes!).

Diversification of your investment money is important. You should never put all of your money into one company. Because you have no control over how that company does or how other investors react to the company’s news, it is best to hedge your dollars by spreading the risk around.

Yet it is possible to over-diversify. Because mutual funds have so much money to invest, they struggle with finding good companies to buy. To keep to the rules of diversifying the portfolio, they cannot invest usually more than 5% of their assets in one single company. This results in lots of dollars being invested into companies you would never consider.

Mutual Funds have to buy lots of mediocre or bad companies because they need to diversify and do something with the billions of dollars they have. It gives the fund shareholders the impression that their money is being invested and the fund managers gladly charge you a healthy management fee.

Active Management is an Expense

Professional management of millions of dollars does not come cheap for most mutual funds. You can expect to pay 2% up to 8% for some specialized funds. These means that if you make 5% return, you would have actually have earned 8% if the Management Fee is 3%. That means that the Mutual Fund has to earn 3% before they can even pay you.

Dollar Cost Averaging is not a benefit if you are getting poor returns. Believe me, I invested consistently for fifteen years directly into various mutual funds. I bought over $125,000 in mutual funds with the biggest dealer and ended up with an averaged return of a criminal 2.05% a year!

It makes far more sense to contribute to a money market fund where there are no fluctuations and then use that fund to make your investment purchases.

Mutual funds do have the advantage of providing liquidity. You can sell and have your cash within a couple of days. But the question is begged why are you pulling out? Investment money is money you should not need right away.

Mediocrity is the Name of the Fund

The sad fact about Mutual Funds is that most them rarely beat the market. It is estimated that only 1.3% of American Mutual Funds will beat the S&P 500. Mutual Funds are investment products and should not be seen as a complete investing solution.

Mutual Funds that get 20% returns in one year have a poor chance of duplicating their results. Companies do a better job of providing consistent performance compared to MFs. If you buy a mutual fund that did well you have a greater chance of it doing poorly the following year.

But just like the stock market where most of them are not worth investing into, the same thing exists in the mutual fund industry. There does exist a small segment that does capture decent, but not market-beating returns. If you want to delegate some of your investment dollars to the responsibility of another, then mutual funds are the way to go. But when doing so, you need to lower your expectations.

The Best Solution: Take Control

If you want diversity protection, low management expenses, and equivalent to market results get Exchange Traded Funds. They should make up a decent portion of your portfolio. You can only get those by opening up a brokerage account.

But while you are opening up a brokerage account and doing dome research into Exchange Traded Funds, you might as well look into investing into stocks. It is only in the stock market where you can get market beating returns and stay way ahead of inflation and taxes.

Stop accepting the pale imitation of stock market returns through the veil of mutual funds. Invest directly and take control. There are plenty of information about Exchange Traded Funds, direct investing in Equities, and Stock Options. Its a classic scenario of time vs money. You are saving time but losing control, and also lots of opportunity to make money.

Investing is a risky process. When you invest, you have to keep the degree of risk you are taking on in the back of your mind. More risk means an increased possibility that you will lose money. If you invest high risk, there’s a good possibility you’ll lose money whereas if you invest in a low risk investment, you will be less likely to lose money. Your goal should be to make as money money as you can with as little risk as possible.

Different types of investments carry varying degrees of risk. Let’s say you have $10,000 that you want to loan for investing and you have 2 friends that need money to start a new business. The first friend has borrowed and repaid money to you many times before. You have trust with them that they will pay you back.

The other friend has borrowed money from you before and didn’t always pay you back. Sometimes it was just $20 they borrowed for lunch, but somehow they just conveniently forgot about it. They want to borrow the money for their new business that they feel confident about, and they swear they will pay you back. Unfortunately, they have failed in past businesses and didn’t pay back the money they borrowed.

The second friend is very risky, but to you, their business idea sounds incredible. You could see it making a lot of money and you’re friend promises that you can share half of the profits. On the other hand, your first friend has a pretty ordinary idea and they promise they’ll pay you back with 8% interest.

You have a lot more risk in the second friend, but you will make a lot more money with them. You have almost no risk with the first friend, but you’re only going to make 8%, no matter how well the business does. You have to decide if you are willing to take the risk on more profit.

The same goes with stocks and bonds. Stocks are more risky, but you could earn a lot more. Bonds are less likely to earn more money, but you’ll at least get back what you put in. The same goes with stock and bond mutual funds.

If you are going to retire soon or if you have already retired, you should focus more of your funds into bond mutual funds. These carry less risk which ensures you will have the money you need once you reach retirement. You don’t want to take too many risks with the money you need to live on.

While your young, invest more in stocks. As you get older you can invest more and more in conservative bonds. This method will allow you to make the most without worrying about losing it.

It is very important that you invest your money. If you think you can’t and yet continue buying movie tickets and video games, you need to reconsider your priorities. Instead of buying junk, you should be buying stocks and bonds. I know I’m making it sound simple, but in actuality, it is. Once you get started saving your money, you’ll have money to invest and you can begin learning everything you can about investing.

If you haven’t started investing yet, you probably don’t know much about it. Fortunately, you don’t need to be a financial genius or college professor to start investing. You don’t have to even know the intricacies of stocks or bonds, there is an easier way.

If you are to invest in stocks or bonds, you need to do research beforehand. If you don’t, you are gambling with your money. If you know nothing about the company you’re investing in, you could be setting yourself up for disaster. By investing in mutual funds, you can make money without putting hours and hours into it. A mutual fund is when many people pool their money together and a professional in finance chooses the stocks to buy.

If you’re worried about the cost, don’t be. Load funds can be pricey with lots of fees. There are also no-load funds which have no funds. They are rarely an inferior investment. Sometimes they can even earn more than a load fund.

With mutual funds that charge a commission, you lose a percentage of your earnings where as with no-load funds, you get all of your return. So even if the loaded fund has a higher return, you might still be making less with it.

Investing in mutual funds are excellent at diversifying your portfolio, especially if you only have a little to invest. By buying with other people, you can buy a wider variety of stocks and not worry about risk as much. If you invested in individual stocks, you could only invest in a few stocks, causing more risk.

Diversifying your stock will decrease risk because if one stock goes down, it’s likely another stock will go up and at least offset it. Basically, you are reducing the risk that your entire portfolio will decrease in value.

You can get started in investing even if you don’t know much about stocks and bonds. Mutual funds are the perfect way to get started. You can start investing with as little as $1,000. Sharebuilder will get you started right away investing.

No matter what your experience is, when you buy stocks the one thing you consider first is whether or not the company has a strong balance sheet. Ignoring this one important piece, could very well cost you a lot of money.

Besides considering that first piece of information, you must make sure that the stock is valued correctly. Should you start to think that buying undervalued stocks means learning about buying penny stocks then you may end up losing money no matter what. Simply put, knowing how to pick stocks like the pros means learning how to buy stocks cheap.

What does this all have to do with cheap stocks? Buying cheap stocks means purchasing them when they are trading below face value. Knowing how to find and buy these cheap stocks is how the gurus make all their money on the market.

What do you do to buy a stock when it is cheap? You must first find a sector that should be performing well or should be performing better. Very that the PE multiple of your stock is favorable when compared to it’s competitors PE multiple. If you have a favorable position and the stock should be at a higher price, you probably just found an under priced stock. Buying the stock should be considered if you think the price should be higher.

Can you then get away with not learning how to start trading mutual funds? Only a fool would think so. Denying yourself the option of learning other ways to invest would be extremely foolish. Don’t be a fool and learn how to invest in mutual funds as well. You might regret not taking the opportunity to learn it. Mutual funds should be a perfect way to grow your savings and retirement money consistently over several years. And who wants to be one of the broke and regretful fools?