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Picking the right investment team

By ANNA VANLANDINGHAM

© St. Petersburg Times, published March 22, 2001


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[Times art: Teresanne Cossetta]
Visualize a high school basketball team that has one outstanding player. Let's refer to this team as Team A. On Team A, the one player leads the team in scoring and rebounding, and is the only player that can get the ball down the court. On a good night this player will score 25 to 30 points. What happens when this player has a bad night? Or gets injured? Sure, a team is needed to win the game, but more often than not, Team A will chalk one up in the loss column because it it too dependent on one player.

Now envision a team that is diversified -- Team B. This team has a couple of players who rebound well, has two or three players who shoot well and several good ball handlers. What if one of Team B's players has an off night? Or is injured? Team B has a much better chance of chalking up a win because the other players can maintain a balance in the team.

The above example can also illustrate the difference between mutual fund investments and individual stock or bond investments. As a rule, this is how it works:

Mutual funds are a pool of investments managed by companies whose job is to invest a pool of investors' money in stocks or bonds (securities). The money of several investors is joined and goes into a number of different securities. It is looked over by a professional who makes adjustments when he or she thinks money should be moved into or out of different securities. In effect, the mutual fund manager selects several good players for its team, rather than rely on one "star."

Mutual funds have become a popular form of long-term investing in the stock market. The reason for this is that mutual funds provide a greater level of diversification, like Team B. There is more diversification than when an investor buys individual stocks and bonds -- single "stars" more closely resembling Team A.

As an investor in a mutual fund, you also are freed from the constant work of watching each stock and making decisions on whether to stay in the stock or move on. Mutual funds are a simple way for investors to share in the rewards and risks of investing -- a team effort.

Full-time financial consultants manage each mutual fund. These professional money managers research general market and economic trends and use this information to decide when to buy, sell or hold the investments to enhance a return on the investors' money. With money spread over a number of investments, the return isn't dependent on any single investment. This means the impact of one poor performer on the value of your mutual fund is a lot less than if it is your only investment.

Some mutual funds may require an initial investment of as little as $250, while others require a significantly higher original investment, such as $2,500 or even $25,000. After that, investors may invest as little as $25 or $50 at a time in the mutual fund. Mutual funds are an easier way for investors with little money to get into the market, and at the same time tap into the expertise of someone who watches securities for a living. Someone else does all the work. Thousands of mutual funds are available that offer a wide range of investment objectives and the capability of specializing in a specific category of stocks. For example, mutual funds can specialize in high growth (and higher risk) stocks, "Blue Chip" stocks that represent long-established companies, or in stocks that are grouped by industry, such as health care or high-tech.

Because mutual funds are currently so popular, there are many of them to choose from. With more than 10,000 funds available, how do you choose the one best for you? In some instances, mutual funds may not be the type of investment you need. So to decide whether mutual funds are what you need, you should assess your other investments and savings.

* * *

Once you have determined your investment objectives, match them with the right type of mutual fund. For example, if you are interested in growth, a stock fund may be the correct choice. If tax-free income is needed, a municipal bond fund (bonds sold by cities, counties and states) could be a good choice. Be sure to ask two questions before committing to a specific fund:

  • What type of stocks and bonds does the mutual fund invest in?
  • Is it a load or no-load fund?

A load fund charges a commission every time an investment is made. A no-load fund does not charge a commission. That doesn't mean it is free, though. You will have to pay an annual fee for maintenance on both types of funds. That fee is usually less than 1 percent of your fund balance. However, because funds charge varying rates, you will need to find out the exact amount of both the load charge and annual fee. And a third fee to determine up front is what you pay on the sale of the fund. Several sources provide this information on the Internet. One example is Morningstar at www.morningstar.com. When you settle on a fund type, get specific information on a number of funds that fall into that category. A report called the prospectus explains a fund's investment objective, the types of securities invested in, the charges and expenses you would have to pay, and any special services and requirements -- such as a minimum amount you have to invest to get in.

Before investing, read the fund's prospectus carefully and ask to see the overall performance record of the fund. That performance record can tell you how much the fund has gained, or lost, over specific periods of time. A fund's past performance cannot guarantee what it will do in the future, but it can give some insight into how well, or badly, it is managed over time.

One way to buy into mutual funds is by contacting a financial consultant. This financial consultant will help to determine investment objectives and good fund matches by discussing your many options.

However, you can invest in mutual funds without using a consultant. One of the ways is through buying directly from the fund company in person, or on the Internet. If you prefer to do this, research the fund on the Internet or contact the company directly to receive information about the fund.

Later on, when you enter the work force, you will find that many companies invest in mutual funds with a company-sponsored retirement plan for their employees. This plan is commonly called a 401(k) plan. As an employee, you may have to make your own mutual fund selections for your plan, so an understanding of mutual funds will be very important to you.

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Internet Resources

www.floridasms.com

www.mfea.com

www.sec.gov

www.fundz.com

www.indexfundsadvisors.com

www.morningstar.com

www.ici.org

Anna Vanlandingham is an advanced placement economics teacher at Lake Mary High School in Seminole County. She has been a teacher for 20 years and has won several national and state economics education awards. Chapters on the securities industry have been reviewed by the Florida State Comptroller's Office, which is responsible for protecting consumer rights in the securities industry.

About the Florida Council on Economic Education

Money Stuff: Get it! Spend it! Keep It!

Introduction and previous chapters

Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the council's programs for teachers and students, please call (813) 289-8489.

About Newspaper in Education

The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or toll-free 1-800-333-7505, ext. 8969.

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