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<font size="+1">
<b>
<font size="+2">M</font>UTUAL
<font size="+2">F</font>UNDS:
<font size="+2">S</font>TRAIGHT,
<font size="+2">N</font>O
<font size="+2">C</font>HASER
</font>
</b>
</font>
<br>
<p>
<p>Published July 8, 1996<br>
<p>
<p>
<a href="/">Other Columns</a> by Ken Kurson
<br>
Tripod <a href="../../../../www_subdomain/money/interviews/960621kurson.html">Interview</a> with the author<p>
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<p>
<p>
<font size="+2">Y</font>ou've been hounded by pitchmen. Your mailbox is a prospectus dumpsite. You've heard the names of countless mutual funds. But a secret burns within: You're not really sure what the hell a mutual fund <b>is</b> and you're too embarrassed to ask.
<p>
<font size="+2">S</font>uffer in the dark no longer, friend, for here we enter the world of jargon-free moneytalk, where no question's too dumb and as with Encyclopedia Brown, no case is too small.
<p>
<font size="+2">A</font> mutual fund is a pool of money raised by a company for the purpose of investing in financial instruments. Those instruments include stocks, bonds, options, money markets and commodities, and are selected by an investment professional. Naturally, there are a thousand different flavors, from aggressive small-cap funds that invest in dicey start-ups to ultra-safe government bond funds where widows and orphans seek refuge from market risk. But the basic characteristics remain the same: a smart investment professional using the collected dollars of small investors to maximize returns on a diversified portfolio.
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<font size="+2"> The mantra of investment strategy? Diversity, diversity, diversity.</font>
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<font size="+2">T</font>he beauty of mutual funds is that they allow you to fulfill the mantra of investment strategy -- repeat after me: diversity, diversity, diversity -- while spreading your risk over lots of companies, all for a very low cost per company.
<p>
<font size="+2">L</font>et's say you had a million bucks. Obviously, it wouldn't be smart to put it all in, for example, Coca-Cola, because even a well-run blue chip like Coke can have a bad year or a bad several years. Instead, you'd put 50 grand in 20 companies (or 10 grand in 100 companies or whatever). Assuming 15 of these did well, you'd more than make up for the 5 that do not.
<p>
<font size="+2">U</font>nfortunately, you don't have a million bucks. You have, say, just the 50 grand that would allow you to make only one of the 20 investments you'd make had you a mil. To divide 50 grand among 20 companies is bad strategy because each transaction you make costs you a commission and the differential between the bid and the asking price. Investing $2500 in 20 companies doesn't make much sense because assuming the same 3/4 of the companies do well, your commissions and differentials will eat up a much greater percentage of your profits than if you invested 50 grand in each.
<p>
<font size="+2">B</font>asically, all a mutual fund does is take 20 people with $50,000 each and invest the total as though it were one millionaire with a well-diversified portfolio. More realistically, it takes <b>thousands</b> of <b>small</b> investors and pools their money to get the diversity and buying power that each sole investor couldn't get alone.
<p>
<font size="+2">M</font>oreover, a mutual fund is managed by someone who's a lot better at picking investments than you are, or your buddies, or your uncle or gossip you overhear at a bar. Some managers -- Peter Lynch, former chief of the Fidelity Magellan Fund, the country's largest fund -- have earned fame for sending their shareholders double-digit returns year after year.
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<font size="+2"> Youngish investors can use age to their advantage.</font>
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<font size="+2">M</font>y recommendations on funds tend toward growth and aggressive growth stock funds. Youngish investors should use their age and time horizon to their advantage by riding out inevitable market dips and keeping their eyes on the sweeter historical returns that stocks have generally provided. There are also, of course, overseas funds and precious metal funds and specific sector funds, that focus on, say, technology or utility stocks.
<p>
<font size="+2">B</font>ut no matter what type of fund you choose, stick to a few general principles. (1) Don't time the market -- ride out dips and stay in for long-term gains; (2) Stick with companies (or funds, in this case) that you understand; (3) Go with companies that have strong, stable management.
<p>
<font size="+2">A</font>ll mutual funds are rated by Chicago's Morningstar, whose journal has become the bible of fund pickers and is accessible on America OnLine or at any library. They make a big production out of downplaying their 1-5-star rating system, but stick with a four- or five-star fund and avoid large loads (fees to get in or out of a fund) when there's a "no-load" equivalent that's as highly rated.
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<font size="+2">Remember, it's often easier than "experts" make it appear.
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<font size="+2">T</font>he mainstream financial press is staffed by writers who think that they'll lose their job and your confidence if they don't refer to "beta" and "p/e ratio" as though everyone whose IQ exceeds room temperature knows what they mean. Those are excellent tools for evaluating securities, no doubt about it. But the claim that you need to understand every last term before you begin to ensure your own financial future is not only fiction -- it's dangerous. We'll talk more about the basics of personal finance in the coming weeks. Meantime, just remember: it's often easier than the self-appointed experts make it appear.
<p>
</font>
<p>
<hr>
<p>
<p><a href="mailto:Greenzine@aol.com">Ken Kurson</a>, 27, writes the "Advocate" column for Worth magazine and appears weekly on CNNfn. His personal finance 'zine, "GREEN: PERSONAL FINANCE FOR THE UNASHAMED," is published quarterly and is available for $3 an issue or $10 for a year's subscription. For more information or to subscribe, write GREEN at 245 8th Avenue, Suite 286, New York, NY, 10011.
<font size="-1"><p>© 1996 Ken Kurson, All Rights Reserved
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