Pool your dough and watch it grow.

Have you ever stopped to think about how great mutual funds are? Didn’t think so. Few of us have the time, interest, or know-how to dissect the stock and bond markets, looking for the investments that might lead to riches. That doesn’t mean we have to rely on lottery tickets as a retirement strategy though. Instead, there are mutual funds, probably available in your workplace’s retirement plan, and which you can invest in on your own too.

How does it work?

Buying into a mutual fund essentially means you’re pooling your money with lots of other folks and hiring some experienced people to manage it. There are many different niches you can zero in on with mutual funds. Some funds focus on large companies, some on small. Some invest only in foreign companies, some only in municipal bonds, and others only in energy companies. Mutual funds also offer instant diversification. A typical stock mutual fund will own more than a hundred different stocks.

With more than 8,000 mutual funds out there, you can be sure there are more than a few that will serve you well. The key is knowing how to find them.

Things to consider

When shopping for a fund, consider first which asset category the fund falls into, such as large cap value, equity income, international equity, investment grade corporate bonds, government bonds, etc. The category is often included in the fund’s name. When you see the word “equity,” this typically means stocks, whereas “fixed income” means bonds. Generally speaking, stocks tend to be more volatile than bonds, but over long periods of time, they tend to outperform bonds too. 

If you see a “load” mentioned, that’s a sales charge. A front end load (also called an A share), will typically reduce your investment by around 5 percent. So investing $3,000 means $150 will be deducted when you invest. This is a one-time sales fee. You can buy other types of shares (called B’s and C’s) that have different fee structures and are designed for different investment time spans. Loads aside, funds also carry annual management fees, which cover the costs the fund family incurs managing its funds.

There are also no-load funds that do not have an upfront sales charge. However, this does not mean they won’t have fees throughout the investment. Again, read the prospectus, or fund description, to understand exactly what the fees are for each fund you may be considering.

You may also want to look into index funds that follow the broad market (for example, S&P 500 Index or Total Stock Market Index).  If the market heads up, they go up. If the market takes a dip, they do too. They generally have lower expenses because fund management involves investing only in the securities of the index.

Want to aim higher?

To aim higher than the market average, seek managed funds with long, strong track records. Always keep in mind that past performance does not guarantee future results. The stock market has returned about 10 percent per year, on average, over most of the past century. Some outstanding mutual funds have long-term averages topping 12 percent and even 14 percent. If you earn 10 percent annually on a $10,000 investment over 20 years, you’ll end up with about $67,000. Up the return to 12 percent, and you’ll top $96,000. The best place to research mutual funds online is at www.Morningstar.com/Cover/Funds.html.

Whenever investing in mutual funds, consider putting your money in a diversified portfolio. That gives you a balance of equity and fixed income funds that can help smooth out the ups and downs of the marketplace. Determine the exact balance of those investments by gauging your own tolerance for investment risk and the length of time that you want to invest. Younger investors with lots of time ahead may be best served by focusing more on stocks, while investors nearing retirement might want to add more bonds for balance.

For Richer, Not Poorer

Put ‘share financial goals’ on the to-do list before the ‘I do’ day.

So, you’ve decided to head down the aisle toward wedded bliss. Congratulations! With some planning and a little discipline, you and your sweetie can enjoy a life together that’s richer in many ways, including financially.

Communication is critical for success. Make sure you and your partner understand each other’s ambitions and dreams along with your goals as a couple.  Come up with a master plan for reaching these goals (such as saving enough for a down payment on a home). It should involve regular saving and investing, but shouldn’t eliminate occasional treats, such as an evening out or a vacation. Discuss your views on subjects such as credit card debt, savings, investments, shopping, splurging, etc. Make a point of checking on your financial progress together regularly—perhaps once per month or quarter.

Learn more in these books: Smart Couples Finish Rich by David Bach and The Family CFO by Mary Claire Allvine and Christine Larson.

Illustrations: Rob Colvin; George Underwood; Photo: Thomas Barwick; Digital Vision