Do-It-Yourself Mutual Funds Investing for the Little Guy

by Gary Foreman

If you don’t have large amounts of money to invest, you limit your attractiveness to financial planners. But that doesn’t mean you can’t invest. Here are some tips for do-it-yourself mutual funds investing.

Dear Gary,
I was wondering what your thoughts are for someone who wants to invest in a few mutual funds and doesn’t have enough business to excite most financial advisors but still feels uncomfortable doing it solo.
Anita

Anita asks a good question. Most of us don’t have large amounts of money to invest, which limits our attractiveness to financial planners. And with investments becoming more complicated, it’s harder for the average guy to know what to do.

Let’s break this into three parts. First, we’ll look at the eight basic rules of investing. Second, we’ll examine the three things a do-it-yourselfer must learn. And finally, we’ll see if we can’t show Anita how to select funds that are right for her.

Sign Up for Savings

Subscribe to get money-saving content by email that can help you stretch your dollars further.

Twice each week, you'll receive articles and tips that can help you free up and keep more of your hard-earned money, even on the tightest of budgets.

We respect your privacy. Unsubscribe at any time.

8 Basic Rules of Investing

These basic rules are the foundation of any successful investing program. Fortunately, they’re easy to understand.

1. There is no risk-free investment, even if you put your money in the bank.

They’ll guarantee that you’ll get it all back, but no one will guarantee how much you’ll be able to buy with it.

2. Time reduces risk.

History has shown that in any given 10-year period, you would have made money if you owned all of the stocks on the NY Stock Exchange, even including the years of the crash of ’29 and the depression.

3. You must consider inflation.

Your investment must grow faster than inflation or you’re losing money. Being too cautious in your investment selection can increase your risk.

4. You must consider taxes.

Even at a 15% tax rate, your growth will be significantly affected. Suppose you invest $1,000, and it grows 8% per year for 50 years. If your growth were taxed each year at 15%, you’d end up with $28,650 at the end. But, if you didn’t have to pay taxes along the way, that same $1,000 would grow to $50,653.

5. Invest early.

Money invested in your twenties has more time to grow than dollars invested in your forties.

6. Invest often.

Don’t wait until you have a big bunch of money to invest. Get into the habit of adding to your account monthly or quarterly. You’ll be amazed at how those smaller amounts add up over the years.

7. Compounding is a wonderful thing.

Having your money make more money sure beats working for it. All you have to do is let your earnings stay in the account and wait for time to pass. Any newbie investor can do that.

8. Doing average is ok.

You don’t need to be a stock-picking genius. Very few people are. All you need to do is to get average returns over several years and you’ll do quite well.

Things Do-It-Yourself Investors Should Learn

OK, now let’s see if we can help Anita grow more comfortable with a do-it-yourself investment project. Like any DIY project, she’s going to have to be willing to learn and to try new things.

The Internet has made it easier to research mutual funds. You can get independent advice from Morningstar.com and The Motley Fool.

She’ll want to learn about three main topics: how commissions and fees will be charged, how to determine what a fund invests in, and how to evaluate past fund performance statistics. These are simple concepts that anyone can understand.

How To Select Mutual Funds

By now Anita should know the basic truths of investing and some idea of how mutual funds work. Next, let’s learn something about a concept that greatly simplifies investing. That’s the “index fund.”

Earlier, we mentioned owning all of the stocks on the NY Stock Exchange. An index fund does just that. An index fund is not actually managed. There’s no one trying to outguess the market. The fund is managed to be a reflection of the index that it represents.

Studies have shown that index funds will generally outperform all but a few managed mutual funds. That makes Anita’s job easier. Instead of picking a fund, all she has to do is pick an index that represents her level of aggressiveness. If she’s cautious, she’ll want a fund that indexes the NYSE, American Stock Exchange, or S&P 500. If she’s braver, she might want to index the NASDAQ. Or if she’s aggressive, she might want to check out one of the technology index funds. Then, she’ll choose a quality mutual fund company that offers a fund for the selected index.

Should Anita be careful as she begins investing? Sure! But, if she starts small, adds money regularly, and continues to learn, she can build a valuable asset for her future.

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.