Saturday, June 9, 2007

MMM: Mutual Funds

Alternate Dimension Andy (ADA):

That stock market shit is nuts. I mean, there are thousands of stocks to pick from, and each of those stocks has about, oh, a kajillion factors that could make it a good or bad pick.

OMG WHAT TO DO

My first instinct is, "Christ, I wish there were someone who was not a fucking moron who would just pick stocks for me." Yeah man, that'd be nice.

HOLY HELL, THAT ALREADY EXISTS

It's called a mutual fund. Here's how it works:
  1. You put money into the fund. (This is an intentionally-vague black box, but the precise "hows" are left for a future post/ as an exercise for the reader).
  2. A fund manager uses that money to buy stocks, bonds, futures, and whole bunches of other shit. Exactly what she buys is determined by the type of fund.
  3. Based on how much you put in, you are given a percentage cut of the mutual fund. So, if you put in a total of 10% of the money into the fund (you'd have to be rich as hell to do it, but let's just pretend), you'd own 10% of the fund.
  4. You can cash out at any time. If the overall value of the fund has gone up, then so has your share.
Why this is rockin' awesome:
  1. The mutual fund is automatically diverse. I'll talk more about what that means in the future, but the short version is this: you're not putting all your eggs into one basket.
  2. Someone else is doing all the work for you. All you have to do is give them your money.
What is not rockin' awesome about this scheme:
  1. The mutual fund manager, believe it or not, is not doing this out of the kindness of her heart. Indeed, she's probably taking a cut of about 2% of the total fund for herself every year. If the fund is worth 100 hojillion dollars, she keeps about half a hojillion dollars for herself every quarter. FUCKED UP, RIGHT
  2. Because you don't have all your eggs in one basket, you're less likely to make a shit ton of money. On average, over the long haul, you'll probably make a little bit of money every year.
Precisely how to choose a mutual fund is a task far beyond the scope of this post. I will say that I recommend against choosing one solely because it has a cool name.

There's a lot more to know about mutual funds, and I'll probably talk about that more in the future. For the time being, just know that they exist, and that they're a good way for a typical investor to invest safely.

Yes, even a jackass like you, ADA.

2 comments:

Moneymonk said...

You said the key word " safe"

If you are going to invest in a Mutual fund, stick with no load index funds, specifically growth stock funds, which I love.

Mutual funds are boring, but sometimes boring is good.

Andrew Kasper said...

monk:

Couldn't agree with you more. Great minds think alike or something?

Index funds are coming up soon in the MMM series.