How to Invest in Mutual Funds

7 Minute Read

You’ve heard for years that Dave recommends investing in mutual funds. You’re all in. But after researching mutual funds on your own, you feel overwhelmed and keep getting lost in the lingo. Front-loaded, end-loaded, over-loaded—you simply need help!

How are you supposed to build a solid nest egg if it’s hard to make sense of your options? The best place to go for a complete explanation of your investing options is a financial advisor. But keep this in mind: While your advisor provides education, you’re ultimately the one who calls the shots when it comes to your retirement. So here are four tips to get you started:

1. Understand the different types of mutual funds.

Before we look at the different types of mutual funds, let’s define what a mutual fund really is. When an investor buys a mutual fund, they contribute to a pool of money to be managed by a team of investment professionals. This team selects the mix of stocks, bonds, money market accounts, etc., included in the mutual fund based on the fund’s specific objective. The major benefit of mutual funds is that they allow investors to invest in many different companies at once.

Mutual funds aren’t complicated. And after decades of investing, Dave still finds that mutual funds are a great pick for retirement savings.

Brant Spesshardt, an investing professional in Raleigh, N.C., helps explain the four mutual fund categories Dave talks about and the reasons why he recommends them:

  • Growth and income: These funds create a stable foundation for your portfolio. Brant describes them as big, boring American companies that have been around for a long time and offer goods and services people use regardless of the economy. With the growth and income, be sure to look for funds with a history of stable growth that also pay dividends. You might find these listed under the large-cap or large value fund category. They may also be called blue chip, dividend income or equity income funds.
  • Growth: This category features medium or large U.S. companies that are experiencing growth. Unlike growth and income funds, these are more likely to ebb and flow with the economy. For instance, you might find the company that makes the latest “it” gadget or luxury item in your growth fund mix. Common labels for this category include mid-cap, equity or growth funds.
  • Aggressive growth: Think of this category as the wild child of your portfolio. When these funds are up, they’re up. And when they’re down, they’re down. Aggressive growth funds usually invest in smaller companies. “So small-cap funds are going to qualify—or even a mid-cap fund that invests in small- to mid-sized companies,” Brant says. But size isn’t the only consideration. Geography can also play a role. “Aggressive growth could sometimes mean large companies that are based in emerging markets,” he adds.
  • International: International funds are great because they spread your risk beyond U.S. soil and invest in big non-U.S. companies you know and love like Trader Joes, Firestone and Gerber. You may see these referred to as foreign or overseas funds. Just don’t get them confused with world or global funds, which group U.S. and foreign stocks together.

2. Don’t Chase Returns.

It can be tempting to get tunnel vision and focus only on funds or sectors that brought stellar returns in recent years. But Brant cautions against that strategy.

“Nobody can time the market,” he says. “Investors just have to remember you never want to put all your eggs in one basket. It’s long-term, and you want to try to keep your investments as simple and as boring as possible.”

Before committing to a fund, take a step back and consider the big picture. How has it performed over the past five years? What about the past 10 or 20 years? Choose mutual funds that stand the test of time and continue to deliver strong long-haul returns.

Watch now: Dave explains his investing process in a recent episode of The Dave Ramsey Show


3. Find an investing advisor.

If Dave has said it once, he’s said it a hundred times: Never invest in anything you don’t understand. No one cares about your future as much as you do, so it’s in your best interest to take charge of your own mutual fund education.

But sometimes you need a little help with translation. And that’s where an investing expert comes in handy.

A good investing professional can help you sort through the lingo and determine whether the mutual funds you think line up with your objectives really do. Be clear about your goals up front to ensure you and your pro are on the same page before you make selections.

Remember to take your time and interview several SmartVestor Pros before you make the decision. You want someone who’s been through both boom and bust times in the stock market so they can give you reliable advice in any situation.

What if you know a lot about investing, and enjoy researching your options on your own? Do you still need an advisor? Yes! In fact, even Dave has an advisor!

Think of your advisor as a coach, yet you call all the shots.

4. Brush up on investing lingo.

You don’t have to be an expert in investing lingo to choose the right mutual funds. But a basic understanding of some of the most common terms will help. Here are a few to get you started:

  • Asset Allocation: The practice of spreading your investments out (diversifying) among different types of investments with the goal of minimizing investment risk while making the most of investment growth.

  • Cost: Be sure to understand the fee structure associated with using a financial advisor. Again, talk with several pros to compare commission structures before you make your decision on a which financial advisor you’ll use. Also, pay attention to the fund’s expense ratio. A ratio higher than 1% is considered expensive.

  • Large-, Medium- and Small-Cap: Cap stands for capitalization, which means money. To most investors though, it refers to the size and value of a company. Large-cap companies carry lower risk, but you’ll make less money. Medium-cap companies are moderately risky, and small-cap companies are the riskiest—but have the biggest payoffs.

  • Performance (Rate of Return): You want a history of strong returns for any fund you choose to invest in. Focus on long-term returns, 10 years or longer if possible. You’re not looking for a specific rate of return, but you do want a fund that consistently outperforms most funds in its category.

  • Portfolio: This is simply what your investments look like when you put them all together.

  • Sectors: Sectors refer to the types of businesses the fund invests in, such as financial services or health care. A balanced distribution among sectors means the fund is well diversified.

  • Turnover Ratio: Turnover refers to how often investments are bought and sold within the fund. A low turnover ratio of 50% or less shows the management team has confidence in its investments and isn’t trying to time the market for a bigger return.

Talk With an Investing Advisor

If this sounds like a lot of information to dig through and compare, you’re right! The good news is you don’t have to do it all alone. You can work with a SmartVestor Pro who understands that you’re in charge of selecting your own retirement investments. Talk with a SmartVestor Pro today!


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