This is a real basic guide to investing for beginners. Sometimes the new investor gets lucky simply due to circumstances. Other times the odds are stacked against you the day you start investing. Here are some incites to help steer the new investor in the right direction.
As a general guide to investing for beginners, stock investing is the centerpiece of the average investment portfolio. Bonds become more important as you near retirement. Stock investing is where you either make it or get busted in your working years, and timing is just about everything.
Don’t overlook the luck factor; and don’t rely on it. If you were lucky enough to start investing in 1982, you had 18 years of easy stock investing and bond investing ahead of you. Stocks (equities) were in a bullish mode and interest rates were coming down from historical highs. A new investor in the year 2000 or in late 2007 was not lucky in any sense of the word. Investing for beginners was tough.
If you are a new investor and frustrated, do what the sports professionals do when they are in a slump: get back to basics, in this case investing basics. Equities and bonds are only half of the equation. Think in terms of four basic investment categories: equities, bonds, safe investments and alternative investments.
Since you can’t count on luck, especially in stock investing, always have money invested in all four categories. Safe investments like bank CDs, savings accounts, and money market securities pay interest and add stability to your portfolio. Alternative investments like real estate, basic materials, precious metals and even foreign securities can produce profits and help offset losses when U.S. stocks and/or bonds are in a slump.
By having money in safe investments and alternative investments as well as U.S. equities and bonds, the investing basics are on your side from a historical perspective. To be honest with you, the financial world has been difficult for most of us to get a handle on since the financial crisis unfolded in 2008. Since then, safe investments have paid peanuts, with interest rates falling to all-time lows. Many other investments, like real estate and basic materials, were hit for heavy losses along with the stock market.
Investing in 2009 was very unpredictable, with stocks soaring after being devastated previously. This is all the more reason for the new investor to go back to investing basics and cover all the bases. Investing for beginners can be tough enough without having to search for investments in all four of the asset classes I have covered. How can you simplify the process?
Mutual funds are available to cover all the bases, including safe investments called money market funds. You pick the funds, and they do the management for you.
A mutual fund is an investment company that pools the varied resources of more than one individual together and invests this money according to a prospectus that contains the general financial goals of the funds members. Each MF is different. Some funds specialize in certain types of investments only, like stocks or bonds, or currency. Other funds spread out investor’s money across a broad range of different types of investments to offer their investors more security by diversifying.
Mutual funds are tradable securities and can be bought and sold freely, at the current value of the securities invested in. The money invested belongs to each individual investor and that investor can withdraw from the fund at any time.
Equity investments are different. Private equity is an asset class the contains equity securities that cannot be publicly traded. These usually come from private money that either invests in the company or acquires it outright. The term equity investment can mean other things in other nations. When private equity is needed it comes mostly from institutional investors.
There are several different types of private equity described below:
• Leveraged buyouts or LBO’s are essentially buyouts in with the leveraged company sells control of the company and its assets.
• Venture capital refers to investments in younger companies, usually in new technologies, new marketing concepts, or new products. Usually subdivided in the age of the companies that it invests in, venture capital likes to work with start-up companies more than it does established ones.
• Growth capital equity investments are usually minority investments in older companies that need capital to either restructure or expand operations.
• Secondary investments are made in existing private equity assets to shore up and strengthen the original investment.
There are many other investment strategies that can be considered private equity investments. A real estate purchase from a distressed seller can be seen as a leveraged buyout. Investments in different publics’ works projects are often part of a privatization initiative on the part of the government.
So then, these type investments are generally non -publicly tradable securities that usually involve private cash.
In both cases the amount of risk each investor incurs depends on the type of investment. Obviously someone investing with venture capital will be at higher risk then someone investing in a LBO of an established company that operates in a safe sector.
If you are considering investing in mutual funds, changing mutual funds or selling the mutual funds that you already have there are several questions that should be answered before you make your decision.
Mutual funds are essentially packages of different investments, many times of different types. Buying into a mutual fund can save you a great deal of trouble in researching individual stocks and other investments. You still need to do research, however, and spend a lot of time in the newspapers, financial magazines and on the Internet.
Each mutual fund is different. Some funds invest in one sector, like energy funds, while others invest in stocks, bonds, Money Market, currency speculation. Each of these funds has their own level of risk involved. Each fund publishes a prospectus, detailing exactly what types of investments that the fund deals with, the funds financial history, and the financial goals of the various investors. If the prospectus is a plan that closely matches your plan, this might be a good mutual fund for you to invest in. If you are young and can stand to lose money, you might want consider a plan with more risk but a higher payoff. If you are close to retirement and want to eliminate as much risk as possible so you might be more likely to invest in a fund that deals with mostly bonds or Blue Chip stocks.
If a fund can offer a higher return on your investment than other options it could be a good time to buy. You can use indexes like the S & P 500 to learn the average return on each fund. If a fund can average more than a 10% return, over a 10 year period this is better than average. Keep in mind though that mutual funds charge about 1% for it’s costs and some funds have other administrative fees as well. Taxes will also take a piece of your return and this has to be factored in to your decision.
How easy is it to get into the fund? Some funds require a minimum buy-in that can be several thousand dollars. How much experience does the fund manager have?
If, before you invest in a fund, you see that it isn’t in line with your financial goals, shop around some more. There are literally thousands of mutual funds available, so you can eventually find one that matches your needs. Keep a daily eye on the fund also. If you see it losing ground or making investment moves that are out of line with either the fund’s prospectus or your personal goals, it’s time to move on to another fund or other types of investments.
Researching mutual funds can be a time consuming task if you have no experience. It can be done however with a little careful planning, knowing what you are looking for and where to find it. It will help considerably if, before you start your research, you lay out a long term financial plan. MFs are structured so that they offer investments that are geared to the financial goals of the members of the fund. Your research should be to find one that closely matches your financial goals and to do that you need to know what your goals are. Here is a general guideline to help you in your search.
• First determine your financial goals and how much risk you are willing to tolerate as compared to the gain that you are seeking. If you are still young you can probably tolerate more risk than someone investing for the first time when they are close to retirement.
• Start using MorningStar. You will want to get a clear, comprehensive look at each fund that you are considering, know whether the fund accepts new investors, how much the initial investment requirement is, what the holdings of the fund are, what the fees are (administrative and sales fees), etc. MorningStar is an information financial information portal that specializes in mutual fund research. It has been in business for a long time, has a very reputable reputation and have many tools that can make your research much easier and less time consuming.
• No load funds can maximize your earnings and drastically reduce your fund expenses. Mutual funds are not free. An MF is essentially a financial investment company and as a business must charge fees to cover it’s expenses and make a profit. Some funds charge both maintenance/administrative fees along with sales commissions and you should be aware of what these fees are.
• Look at all the varied holdings of the fund. Some Mutual funds, Like RiverSource specialize in highly speculative, single sector markets. While these investments can generate a great deal of income, they are very risky. If you are a new investor or just conservative you will want to look to a fund that spreads it’s investments over several sectors and types. If you have investments in technology and manufacturing and communications, as well as an assortment of stocks, bonds and money market, the bulk of your money can be protected.
A small cap stock is, broadly speaking a company with a market capitalization of less than $800 million and a small cap mutual fund has a primary focus of investing in small cap stocks. Anyone with a decent mixture of small to mid-cap stocks will tend to end up with better returns than a portfolio with a majority of large cap stocks. Small companies tend to outperform on the stock market over a 3-5 year period and if you can catch a small cap in its initial cycle you can ride the crest of the wave.
The following stocks are well performing small cap stocks with the following criteria. Each has a minimum investment of $3,000, a 5 star rating, an expense ratio less than 1.59%, and a yearly return of 16.7%.
Buffalo Mutual funds was initiated in 1998 and is currently managing $2.2 billion in assets. It has been a very reliable performer for the last several years with a return at 28% and it sits squarely at the top of its category in the 1-year return. Buffalo has as it’s holdings ITT Educational, one of the top tech schools in the world, Fidelity Institutional MM Fds Government I, WMS Industries and Panera Bread Company Inc A.
Wasatch Small Cap Growth has been around since 1986 with the same fund manager. It has $722 million under its management and has a 29.6% return, moving its rank up to 3 in the small growth category based solely on its one-year return. Wasatch has holdings in O’Reilly Automotive Inc, Resources Connection Inc., and HDFC Bank ADS.
Baron Growth is a small growth fund that opened its doors for business in 1994 and it’s current manager came on board just one year later. With $4.9 billion in assets under it’s control it’s a power on the mutual fund scene. Baron is a no load fund with an initial investment of just $2,000. This fund took some damage in 2008 but has pulled back well and it’s YTD is 18.77%, above average for the category. Baron has holdings in DeVry Inc., another top technical school, Strayer Education Inc., Edwards Lifesciences Corporation, and several other education and tech stocks.
Small cap stocks serve to balance a profile well and can be used liberally. Since most of the initial investment requirements are very low it is easy to get into a small cap and spreading them around can greatly increase your bottom line.
A precious metal mutual fund is a fund that invests exclusively in one precious metal or another. Some funds invest in a range of metals with other stick to one metal or the other. These investments may be in tangible metal or they may include stock in mining companies. Some stocks seek long term appreciation of assets while others chase after quicker, faster money. Because of the volatility of any precious metal, precious metal mutual funds are among the riskiest of all funds.
Gold, silver, platinum and precious stones have historically been safe investment harbors for investors. Metals funds allow investors to diversify portfolios, use professional management to oversee the day to day operations of the fund, are liquid, and have a usually much lower initial investment amount then individual stocks offer.
Three PM funds have shown themselves recently to be very good, very stable (when compared to the rest of the field) and good returnees.
Van Eck International Investors Gold has had Joseph M. foster as the lead manager since 1998 and he has done a remarkable job. Van Eck seeks long-term capital appreciation by sinking investments in common stocks of gold mining companies. Usually at least 80% of the funds total assets are in gold mining stocks and sometimes up to 100%. The fund pays dividends four times a year and capital gains once a year. Van Eck has an expense ratio of 1.44%
Fidelity Select Gold Portfolio was incepted in 1985 and also seeks capitol appreciation. Another fund that invests the majority of its stock in companies engaged in gold related activities, it doesn’t restrict its investments to gold mining companies. Fidelity also buys gold and coins. The fund manager also invests in other precious metals and the securities of companies that manufacture precious metal and minerals products. Fidelity requires a minimum investment of $2,500 and has an expense ratio of.89%, which is very low.
RiverSource Precious Metal & Mining A opened its doors in 1985 and hasn’t looked back. Another fund seeking long-term growth of capital, RiverSource primarily looks for securities of companies engaging in the exploration, mining, processing, or distributing of gold and other precious metals. RiverSource doesn’t limit itself to only precious metals but engages at least 50% of its assets in foreign securities.
The year 2008 was an eye opener for many investors and financial experts who watched the markets lose several thousand points in a matter of months and many, many individual stocks losing 50% or more of their value. Stocks that actually made steady gains during this period could be counted on one hand. Trying to maintain a steady portfolio can be hard work at any time, but during times like those it can be a nightmare.
People who owned mutual funds during this period were safer than most because mutual funds generally spread their investment monies across the board to many different investments and types of investments.
If you are considering investing, or reinvesting if you pulled out during the economic downturn, you will want to look for mutual funds with a good cash flow, either through bonds or dividends. This is a very important factor if stocks go back into a decline. The bonds can supply interest and the dividends have an income of yield percentage.
Here are a few different funds that did well last year. Take you time and research each one to find out if it’s financial goals match yours. This list is compiled on the funds future potential and long term performance.
• Franklin Gold and Precious Metals has been one of the best funds of this year and over the past 10 years. The fund has shown a consistent 14% return and a current dividend of 8.3%. Since gold is now at an extremely high level, this fund will continue to thrive.
• The New Alternatives Fund seeks companies that focus their efforts in eco-friendly ways of doing business, renewable energy sources, and energy conservation and environmental protection. Green energy will be booming in the next 2 decades and beyond and any investments in this area can be very profitable.
• Franklin Utilities Fund has a dividend of 4% and an annual yield of 5.17% which is several times better than many funds. Utility companies have always been and are sure to remain solid investments for those interested in stability and steady, predictable income sources.
• Any municipal bond fund is a good choice. While bond rates have increased recently they continue to be a great way to collect regular interest and keep your principle safe.
Mutual funds are one of the safest investments during times of economic instability. Finding a fund that fits your needs should not be difficult with more than 10,000 funds available.
Investing in mutual funds is one of the best ways to improve your portfolio but in order for you to make MFs work for you is to understand how the funds work. Mutual funds are considered an open ended option which gives investors many options about how they handle this investment. Investors may join or leave at anytime and the funds are liquid, which means that they can be traded or sold.
There are many different funds and many different kinds of funds however and understanding that each fund has different financial goals that are driven by the fund members particular financial desires, can be a big plus and it is advisable to research the various funds and types of funds.
Growth funds are funds that invest in what is known as growth stocks. Growth stocks are stocks of companies that have entered now products or services to the market and are expected to achieve rapid growth when compared to other companies in that sector.
Mutual funds offer a long term investment option with a great deal of flexibility for the investor. Here are a few of the pros and cons of investing in growth funds.
• Since growth funds are more speculative than other types of funds your risk level can increase significantly. The new product or service can fail to produce at the expected level and the company could fail.
• The expected growth could explode exponentially and increase dramatically in value almost over night.
• Most growth funds take a great deal of time to develop to it’s potential and investors must have a great deal of patience in order to receive the maximum financial rewards.
• Success of the fund can lead to a steady, regular income, while failure of the companies investing in can lead to losing you investment.
• Mutual funds come with a sales fee and administrative fees. The administrative fee comes off the top of the investment amount while the sales fee is subtracted from any profits.
Growth funds are usually called nest egg funds. The basic strategy is directed toward equities that have high tolerance and high growth, not equities that pay off quickly but in smaller amounts. Taking on a growth fund for your portfolio can easily lend a certain amount of stability and assist you in diversifying more effectively. Remember though, with growth funds, patience is the key.
India can be an investors paradise or and investors nightmare. India was a region hit hard by the economic downturn of the last couple of years but has been bouncing back nicely from the nearly 53% lose taken last year. It has rebounded well though, much faster than other developing countries and many foreign investors are channeling funds into this “new” market. The top 10 current Indian mutual funds are:
• The Matthews India Fund offers investors specific exposure to India’s economy but investing in Indian start ups.
• Reliance Capital Asset Management managed more than one half times more money than it nearest competitor with more than $21 billion rupees in assets.
• Britain’s Standard Life Investments owns a large stake, 40%, in HDFC, India’s second largest private-sector lender. This firm managers $527 billion rupees in June and is still growing.
• Prudential Plc, a part of the British Financial services group, has a nearly 59% stake in ICICI Prudential Asset Management, with only ICICI holding the remainder.
• The State Bank of India and Punjab National Bank, along with Life Insurance Corp, all state run entities, each own 25% of UTI Asset Management which is the oldest mutual fund company.
• Birla Sun Life Asset Management is a joint venture between Aditya Birla Group and the Canadian insurer Sun Life Financial and manages $410 billion rupees.
• Societe General has obtained a 37% stake in SBI Funds Management, with State Bank of India, the largest bank in India. This fund manages $300 billion rupees.
• Franklin Resources Inc. owns India’s sixth largest fund, Franklin Templeton Asset Management and manages %247 billion rupees.
• Tata Asset Management is controlled by Tata Group, which controls more that $238 billion rupees in June. The firm is also allying itself with Britain’s New Star Asset Management, to manage New Star India’s India-dedicated funds.
• Kotak Mahindra Management is owned by Kotak Mahindra bank Ltd, which has an alliance with T. Rowe Price in an effort to launch global funds.
With India’s newly booming market opportunities, it may be just the place for savvy investors to squirrel away some money for better returns.
Previously we discussed stocks, bonds, and cash as investment vehicles. I mentioned that, unless you have specialized knowledge in the financial industry and want to spend significant time conducting research on individual stocks and bonds, mutual funds are probably your best way to invest.
Mutual funds give you professional money management and allow for diversification even if you only have a little bit of money to start investing with. Most people who have company sponsored retirement plans like 401Ks, 403bs, etc. are invested in mutual funds and are somewhat familiar with them, but some may not be so I will discuss the different types of funds available.
In very simply terms, a mutual fund is simply a pool of money that is invested in a portfolio of securities (aka stocks, bonds, cash, or other investments). The mutual fund has a portfolio manager (or sometimes several) who are investment professionals and they make decisions on which securities will be purchased by the fund based on the particular fund’s objectives.
There are literally thousands of mutual funds out there to choose from and sometimes it can be a little overwhelming when trying to determine which ones to choose. I will spend quite a bit of time in following segments discussing that, but generally funds are categorized and there are many categories and even sub categories. For example a stock fund may specialize in large cap growth stocks or it may specialize in high yield bonds, etc. We will get into these categories deeper in later segments. Some even get as specific as investing only in certain segments of industry.
One key thing to think about when looking at mutual funds is fees. There are two basic types of fees involved in a mutual fund from a consumer standpoint. The first is commonly called a “load”. This is a sales charge from which the person or company who sold you the fund is paid a commission and the rest usually goes to marketing, etc… When that sales charge is assessed is usually determined by which class of shares you purchase.
There are several types of shares, but the most common are A, B, and C class shares. The sales charge on A shares is known as a “front end” load, meaning that you pay the sales charge up front. It’s usually a percentage of your purchase that can sometimes be as high as 5%. Charges for B class shares are known as “back end” loads. If you pull the shares out within a specified period of time you get hit with a deferred sales charge which is often prorated depending on how long you leave them in. Some companies offer C class shares which have an annual fee based on a small percentage (e.g. 1%) of the assets.
There are also “No Load” funds which do not charge these sales charges per se, but that doesn’t mean that you get a free lunch. With these you will pay management fees in some form or another.
The fees that a mutual fund can charge are regulated by the Securities and Exchange Commission and are covered in the fund’s prospectus, usually somewhere in the first few pages. You can hit the SEC’s website to get the most current information on these fees.
A quick word about the prospectus — it is required by law that your broker or the company you buy the funds from provides you with a prospectus when purchasing any mutual fund. In addition to outlining fees and sales charges, the prospectus is a wealth of information regarding the fund’s objectives, their investment guidelines, performance information, etc. It’s often very dry reading, but I highly recommend that you review it before making a purchase. If you are using a financial planner or a broker part of the services they should provide is to go over some of the more important parts of what’s in the prospectus. If they are not willing to do that in a way that you can understand I’d recommend that you look for another broker!