How to invest in mutual funds
Do you want to make your money work as hard as you do? One way for beginner investors to do so is by improving their financial literacy from reading these blog posts and applying that knowledge to investing in no-load mutual funds.
As a former mutual fund registered representative I know that the majority of people in America don’t understand investing. The prospects and clients I use to talk to knew very little about mutual fund investing. Quite often they understood what I told them and they would invest using my recommendations.
My father, who was very smart know nothing about investing. He relied on me for advice. In fact, my parents told me a long time ago that they were able to pay for two vacations to Europe, or nearly two entire vacations because they followed my investment advice.
I can’t make any kind of promises about your investment success using the information I provide here. Nothing you see on this blog should be considered to be financial or invest advice.
It takes a lot of time and effort to learn the ins and outs of stocks, bonds other types of securities. You have to be able to understand investment terms as well as the commissions, fees, expenses, loads, etc. associated with buying and selling each type of security.
Hi, my name is Jim Juris. I am the owner and editor of the Five Dollar Investor blog.
I understand how confusing investing can seem to most people. That is why I created this blog. In these blog posts I provide much of the information that I learned, over a long period of time, in a way that the average teenager would understand.
I hope that you enjoy my writing style. Please comment and ask questions in the comment section below my posts.
Knowledge is power
Did you know that first-time investors can invest in no-load mutual funds with a very small amount of money such as five dollars? All of the investments I have made since April 1, 2020 have been between five and one hundred and fifty dollars ($5 – $150).
Become a well educated investor.
It is my belief that the more you know about mutual funds before you invest any money in them the less likely you will be to lose money over a long period of time.
You won’t find the information on this blog to be overwhelming because I wrote the content so that an average teenager can understand what they have read.
After reading this blog post novice investors will have a good understanding of both load and no-load mutual funds, minimum investment requirement, their fees and expenses, how to choose funds that are suited to your investment risk tolerance, the minimum length of time you should hold them, the advantages of owning them compared to owning individual stocks and where and how open a discount brokerage account to buy and sell them.
Investing in mutual funds for beginners
Keep reading this blog post to learn more about how first-time investors can open up a Fidelity brokerage account with no initial investment.
Once you have set up your brokerage account you can add money to your account using electronic fund transfer (EFT) and buy no-load mutual funds with very small amounts of money, even with amounts of money as small as five dollars, or less.
It will take one to three days for the money to arrive in your brokerage account. Once the money is in your account you can start investing.
Why should you listen to me?
Back in the 80s, I sold mutual funds as an insurance agent and as a registered representative for a major insurance company.
Before I was allowed to sell mutual funds and variable annuities and variable insurance products, I had to take and pass the Series 6 securities exam. I also took and passed another exam but I can’t recall which one.
Investing money fascinated me and I began watching TV shows to learn all that I could about investing money. I also would read newspapers such as The Wall Street Journal, Investor’s Business Daily, and my local newspaper business section. Occasionally, I would also read Barron’s magazine.
I spent many hours watching TV shows on investing and reading numerous publications. All of this was time well spent because it taught me a lot about stocks, bonds, and mutual funds.
I was able to pass on some of this knowledge in sales presentations. It was important to me to educate potential clients before I sold them variable life insurance, variable annuities and/or mutual funds.
I wanted my clients to feel comfortable with my recommendations and I also wanted to be able to sleep at night.
OK, that is enough about me. Now it is time to start learning how to invest in mutual funds. There is a lot of information to cover so lets get started.
If I remember correctly, back in October 1987 the stock market crashed, the DJIA had dropped by approximately 508 points. That was the first time the Dow had ever closed, either up or down, by 500 points in one day.
Today, a move of 1,000 points in one day, either up or down on the Dow is not uncommon. These vast swings in the Dow can occur for numerous reasons including economic and political.
I happen to enjoy watching what the markets are doing throughout the trading day. I also learn a lot from research I do on most days when the market is open.
I love doing research by reading articles on investing online and sometimes watching videos.
As I recall, the market low was on March 23, 2020 and I started investing on April 1, 2020.
In this crazy market, the NASDAQ is actually positive Y-T-D, and trending upward, as of the early part of April 2020. This is one of the things that are currently working in my favor.
In addition to this, I started to invest very close to the where the DJIA, S&P 500 and the NASDAQ markets all bottomed.
While many people have sold, I have been buying using very small amounts of money, usually $25 or less each time.
You will not find anything on this blog regarding retirement accounts of any type. Seek professional advice from a CPA about this topic.
I may mention bonds and fixed income investments a tiny bit, but only to try and give you some awareness of these investments.
Another topic that I will only touch briefly on in this blog is preferred stocks.
If you came here because you want to learn how to “make a killing in the stock market”, you have come to the wrong place.
Asset allocation consists of dividing your investments up into different types of investments such as stocks, bonds, along with stock, bond and balanced mutual funds and CD. The primary reason you do this is to cut down your investment risks.
Time is not on your side as you get older. You may not be able to make up your investment losses when you are in your sixties or seventies by investing in equities.
Reducing your exposure in equities and moving more of your money out of equities into bonds, CDs, balanced and bond mutual funds is something to consider when you are approaching or are already enjoying retirement.
Keep in mind that inflation erodes cash. By holding your money in cash or cash equivalents, your purchasing power decreases over time.
Having a little less safety of principle and a small amount of exposure in equities in your asset allocation mix is something to consider in order to keep up with inflation.
In 2020, interest rates are slightly above zero. This makes it hard to find any investments which can provide a reasonable return on your money other than equities. However, along with the possibility of high return on your investment is high risk.
A balanced fund is something to consider because a balanced fund reduces your exposure, as well as your risk. That does not mean you have no, or very little, risk by owning a balanced fund. You can still lose money by investing in a balanced fund.
What is your investment risk tolerance?
I feel that it is vital for you to know your investment risk tolerance before ever investing any money in any type of securities. Your investment timeline will help determine your risk tolerance as well as your investment choices.
Stocks don’t not always go up, they can drop and do so quite rapidly. A perfect example of this is the beginning of 2020 when just about every stock out there plunged because of the pandemic. Some stocks plunged more than others.
By having a long term timeline to weather the ups and downs of equities you will be able to leave your investments untouched.
Bear markets normally last about six to eighteen months, but there is no guarantee that a bear market will end in eighteen months. A bear market could last for twenty four months or longer.
Risk tolerance will be different for every individual and knowing ahead of time what amount of risk you are willing to take before investing will help narrow down your investment choices.
Don’t make the mistake of buying high and selling low because you did not know your risk tolerance before you invested.
I highly recommend checking out my blog post on risk tolerance before proceeding any further on this page. Your wallet may thank you.
Before I start talking about mutual funds and mutual fund investing it may be helpful for many of you to start off first with an introduction on stocks.
Now, with all of that out of the way, let’s get started in learning about stocks and how to invest in the equities markets with a very small amount of money.
This blog is geared towards first-time investors and small investors who want to invest five dollars or other small amounts of money into Fidelity no-load mutual funds and ETFs rather than individual stocks
This blog may be ideal for:
- investors in their 20s
- investors in their 30s
- investors in their 40s
- investors in their 50s
You can learn more about exchange traded funds ETF by going to my exchange traded funds blog post.
I will define a small amount of money to be $500 or less.
Take advantage of compounding
Compounding money is earning money on the money your investments have already earned. This is why it is extremely important to start investing as early in life as possible in order to get the benefit of compounding growth over a long period of time. Reinvest your dividends and let them earn money.
Understanding the basics of investing
Let’s begin with a basic understanding of stocks and the three major exchanges
The DJIA (Dow Jones Industrial Average) consists of only 30 companies traded on the NYSE (New York Stock Exchange).
The Dow Jones consists of well established companies such as Microsoft (NYSE: MSFT), Coca Cola (NYSE: KO), Disney (NYSE: DIS), Visa (NYSE: V), and Boeing (NYSE: BA), and it concentrates on the stock price and is hence dependent on the companies earnings.
The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. Investors use it as the benchmark of the overall market, to which all other investments are compared.
The NASDAQ is a stock index consisting of more than 3,000 companies traded on the NASDAQ (National Association of Securities Dealers Automated Quotations System).
The NASDAQ is the world’s second-largest stock exchange based on market capitalization. It is a tech-heavy index. That can be a good thing or a bad thing.
Companies that are traded on the NASDAQ are generally younger, more dynamic and more focused on science, technology and innovation.
The heavily weighted technology stocks traded on the NASDAQ are Facebook, Amazon, Netflix, and Google. These four stocks are also referred to as “FANG” stocks for obvious reasons.
When you also throw in Apple it gives you FAANG.
The technology heavy NASDAQ Composite price can be very volatile.
It is an electronic exchange where stocks are traded through an automated network of computers instead of a trading floor.
On February 19, 2020 the Dow closed at a record high.
The DJIA record low for 2020 was on March 23, 2020.
Both record low and record high dates stated above for the DJIA were as of April 11, 2020.
Beta measures the volatility of a stock compared to the market. Beta is measured against the S&P 500 (the market).
A stock with a beta of 1 has the same volatility as the S&P 500.
If a stock has less volatility than the market it has a beta of less than 1, such as 0.7 or 0.9, and for a stock that has more volatility than the market it will have a beta of more than 1, such as 1.2 or 1.3.
Can I invest in the equities markets with just $5?
Yes and no. The answer depends on the brokerage firm you choose to invest the five dollars and what investment you want to make. Keep in mind that there are many investments that have a commission or sales load/fee.
Lower discount broker account trading commissions
Mutual fund and exchange traded funds, ETF load, fees and expenses take money from your portfolio. For example, if a fund has a minimum investment of $1,000 and a 5% front end load, you are not actually investing $1,000 because $50 is taken off the top for the load. You are actually only investing $950.
With the decline or elimination of broker trading commissions, it is feasible for novice investors to start investing in stocks using a small amount of money such as five, ten or twenty dollars with mutual funds.
For example, Fidelity offers a number of mutual funds that have no load and no minimum purchase requirement so you could purchase partial shares in five mutual funds, $1 per no load mutual fund, by purchasing fractional shares of five different mutual funds.
Or, you could purchase fractional shares in two mutual funds by investing $2.50 in each fund.
I don’t recommend investing less than five dollars into a mutual fund because it is such a small amount of money.
However, an investment of one to five dollars may be a good way to get started investing and gain knowledge on investing as well as mutual funds.
Making such a small investment will allow you to sleep at night without worrying about your investment.
You will learn how to pick a mutual fund. Plus, you can periodically check the funds performance.
Although stocks have a high risk they are easy to purchase and sell.
There are no guarantees that your stock investments will appreciate in value. Some people consider the investment risk to reward ratio acceptable.
Over a long period of time, common stocks have provided a higher rate of return compared to bonds, money held in a certificate of deposit or a bank savings account.
A stock can be bought and sold on a stock exchange or privately. In order to prevent fraud, stock transactions are heavily regulated by the government.
A share of common stock is priced at what investors are willing to pay for that particular stock at a certain point in time. Stock volatility is the amount a stock’s price moves up and down.
If a common stock pays dividends, not all stocks do, the dividend can be used to purchase more shares. The dividend can also cushion a decline in the stock share price.
McDonald’s (NYSE: MCD) is one company that pays a dividend to its shareholders. This is not a recommendation to buy or sell shares of MCD.
A single share of stock represents fractional ownership of the corporation in proportion to the total number of shares
As a common stock shareholder, you share in a company’s success over time through stock appreciation.
As shares go up in value, over time, you can sell them at a profit. Of course, if shares go down in value you could lose your entire investment.
Read about my experience buying and selling stocks.
What is the difference between common stock and preferred stock?
Common stock ownership is best suited for investors looking for long term growth. Common stock shares have unlimited upside potential along with high risk. The stock price could also drop all the way down to zero.
Preferred stock is best suited for investors looking for income. Just like common stock, the share price could drop down to zero. Preferred shares of stock have limited upside potential because preferred stocks are somewhat similar to bonds. Both have seniority over common stock.
In the event of a public company going bankrupt common stockholders get paid last. Preferred stockholders, bondholders, and creditors have priority.
Preferred shareholders get paid dividends before common stockholders because they have seniority. Dividends are never guaranteed.
The market value of preferred shares is sensitive to changes in interest rates. If interest rates are rising preferred shares will drop in value.
Callable preferred stocks have a feature where the company can redeem shares the stock. This is one of the risks to owning preferred risk and it is known as call risk.
If you own callable preferred stock the issuing company can call back the stock when interest rates fall at the price specified in the prospectus. The company can then issue new shares of preferred stock with a lower dividend yield. Not all preferred stocks are callable.
Passive Vs active investing
Active investing requires you to spend time researching various companies before you invest your money. You must monitor your investments to make sure that they are performing well.
Passive investing is investing in mutual funds. You don’t have to spend time researching different companies each time you want to make an investment in a stock.
You simply pick a mutual fund and invest in that fund(s). The mutual fund manager does all the work for you when it comes to researching companies.
Are you paying yourself FIRST?
I want to encourage everyone who arrives on my blog is to get in the habit of paying yourself first.
Mutual funds are not short term investments
Don’t make these eleven mistakes when investing.
All mutual funds should be considered to be long term investments.You must be willing to hold onto your mutual fund investments for a minimum of three to five years. Five years is a better minimum investment time.
If you are going to need the money in less than three years you should not invest in mutual funds. If you do you could take a loss when you sell.
what is a mutual fund?
Merriam Webster defines the financial definition of a mutual fund as open-ended investment companies that pool investors’ money into a fund operated by a portfolio manager.
This manager then turns around and invests this large pool of shareholder money in a portfolio of various assets or combinations of assets.
Open-end mutual funds do not trade on an exchange like a stock. Instead, they are priced once a day at the end of the trading day.
There are also closed-end mutual funds. Unlike open-end mutual funds which have an unlimited number of shares, a closed-end mutual fund has a set number of shares available. After the initial public offering the fund is closed and the shares are bought and sold on the market.
Investors can not sell their shares back to the fund. Investors selling closed-end fund shares may end up selling them at a price that is lower “discounted” than their net asset value (NAV). These types of mutual funds are not very popular so that is all that I will say about them.
Mutual funds come in various types such as investments in stocks, bonds, options, and money market securities. Each fund will have a stated objective and that objective will determine the investment risk factor. The combined holdings of a mutual fund are known as the funds’ portfolio.
The Securities and Exchange Commission (SEC) requires a copy of the funds’ mutual fund prospectus be delivered either before the purchase or during the time of delivery of fund shares to investors.
Your brokerage firm should be able to provide you with a prospectus on its website. Read the prospectus before investing any money into the mutual fund(s).
The prospectus will include the objective of the fund.
The fund objective will be one of the following:
- capital appreciation, also known as growth;
- a combination of both growth and income.
In general, a fund that is seeking capital appreciation is considered more aggressive and a higher risk than a fund that is seeking income. They also have a higher potential for a higher return as well as the possibility of a greater loss.
Learn about mutual fund capital gains and dividend distributions.
Funds that invest in income-producing securities have a more conservative investment strategy along with the potential for a lower return on investment.
Here is how I conduct research before I invest my money in any mutual fund.
There are a number of risks for financial loss with investing in mutual funds. Some of these risks include market and credit risks. The investment risks for a mutual fund will be spelled out in the fund prospectus.
All mutual funds have investment risk. It is important to understand the funds’ objective and if the risks are in line with your risk tolerance before investing.
Some of the factors to consider in your risk tolerance include your age and financial situation.
Never invest in something you don’t understand! This applies to stocks, bonds, mutual funds, ETFs and any and all other investments not mentioned here.
In the prospectus, you will find information on the fund fees and past performance. It will also contain information about fund management, shareholder information, and the Statement of Additional Information.
If you enjoy reading books, you can find new and used books on business and investing, and many other subjects at Abe Books (affiliate link below). I just read the Richest Man In Babylon by George S. Clason. Another book that I enjoyed reading was Who Moved My Cheese by Spencer Johnson M.D. Both books are quick reads. Think and Grow Rich by Napoleon Hill is another book you may want to check out.
Sector mutual funds and exchange traded funds (ETFs) focus on businesses consisting of one particular sector of the economy or industry.
Since sector funds only focus on one area of the market they are not diversified. Because of their lack of diversification they have a higher risk.
Fund managers can not invest outside of that one particular sector.
Some examples of sector funds are:
- health care
- real estate
- health care
- consumer staples
The utilities sector is interest rate sensitive. Their value may decrease as interest rates rise. Dividends can be attractive. Utility funds should never be used as short term investments. I wrote a blog post about what type of investors would want to consider owning utility funds.
Dividends are never guaranteed and companies can reduce or stop paying them in tough economic times. This occurred in the first half of 2020.
About 75% of the total cash value of the six mutual funds I own are pretty evenly split between two funds, a utility fund and a consumer staples fund.
Because of my age, I decided to take four of my funds, which performed fantastic while I held them, and I sold two of them and immediately purchased the consumer staples fund.
I took two other funds, sold them and immediately purchased the utility fund. Both are Fidelity funds.
By doing this, I have now decreased, by a significant amount my exposure to technology sector stocks and I traded technology exposure for dividends along with less market risk.
Of course, the returns are not likely to be as high in a bull market, but the declines in fund values will likely be less when we are in a bear market.
I own four other funds that may have a small exposure to technology stocks in their portfolios, which is fine with me.
Consumer staples are likely to outperform the broader market in turbulent times. However, you are not as likely to experience a return equal to the market (S&P 500).
In other words, you are giving up some of the reward for a higher degree of safety. I wrote a blog post about how to reduce your risk and receive income from dividends with a consumer staples fund. I own shares in a Fidelity consumer staples fund.
Consider this sector if you are looking for income from dividends, less volatility, and want to get away from technology stocks. Consumer staples should be considered a long term investment because this sector, like all other sectors, can and does lose money in the short term.
You can also find sector index funds that are available as ETFs.
Understanding mutual fund classes
Mutual funds can be:
- Class A funds have a front end load which is a fee you pay at the time of purchasing the shares in the fund.
- Class B funds have a load or a fee you pay when selling shares.
- Class C funds have a level load that is set at a fixed percentage that the investor pays throughout the year.
If you invest in a fund that has a front end load of 5% and you invest $1,000 the actual amount of money you are investing is only $950 because $50 will go to the front end load.
Some funds discourage holding shares in the fund for a short period of time such as one year by charging a redemption fee. You do not pay a redemption fee when selling shares once the redemption period specified in the prospectus has passed.
Fidelity offers some no-load (no sales fee or commission) mutual funds. Obviously, you benefit more by investing in no-load mutual funds. Check with your brokerage firm to find out if they offer any no-load mutual funds.
Just because a fund is no-load does not mean you should invest in that particular fund. You must read the prospectus and look at the fund(s) objective, past performance, etc. before investing.
Although it may be a good idea to diversify your investments by owning mutual funds that invest in foreign countries, countries outside of the United States are not doing very well right now economically.
I urge you to use extreme caution if you are considering investing money in any type of investment outside of the U.S.
FULL DISCLOSURE: I have a very small investment in a Fidelity emerging market mutual fund. The fund I invested in is Fidelity Emerging Asia Fund, symbol FSEAX.
Advantages of investing money in mutual funds
There are a number of advantages to mutual funds. They offer:
- professional management
- investment diversification
- some mutual funds are no-load
- you can buy some mutual funds with very low or no minimum investment requirement
Owning numerous stocks that are professionally managed for you is one of the biggest advantages to owning mutual funds over owning one or a small number of stocks that you have to research and manage yourself.
In most cases, when you own fifty, one hundred or more stocks in a fund and the market is declining your fund is likely to see a smaller overall decline in value because of diversification compared to owning a portfolio consisting of two, five or ten stocks that you own and manage yourself.
Of course, even with diversification, in certain instances, most or all stocks can decline in value such as what occurred in the markets at the beginning of 2020 due to the pandemic.
In my opinion, you should never invest in a mutual fund that is less than three years old.
Knowing the fund performance over a three year period is very important. A five year fund performance is even better, but not absolutely necessary.
What is an index fund?
An index fund is a representation of s financial market indexes such as the DJIA, S&P 500, and NASDAQ. ETFs (exchange-traded funds) also have index funds. The index fund holds the same stocks in its portfolio that makes up the index it is modeled after.
Advantages of Index funds
- less risk compared to investing in individual stocks
- lower fund expense ratio and lower commissions
- passive investing, very little effort is needed by investors who invest in index funds
The main disadvantage to owning an index fund is that an index fund such as the S&P 500 can be very volatile.
You will not be able to beat the performance of the index by investing in this fund because you are investing in a fund that replicates the stocks held by the index.
After all costs and expenses are taken out by the fund for running and managing the index fund your actual return will be slightly less than that of the actual index.
For example, let’s pretend that in a particular year the S&P 500 index fund had a great year and it was up 19.8% for that particular year.
As an investor in an index fund that replicates the S&P 500 your return on that fund will be slightly less than the performance by the index, so it would be somewhere around 19.4%.
Plus, there may be many stocks in an index fund that you don’t want to invest in for whatever reason.
Understanding balanced mutual funds
Balanced funds are a mixture of stocks, bonds and some money market, all in the same portfolio. The idea of a balanced fund is to lessen investor risks.
It is important to keep in mind that although your investment risks are less when investing in balanced funds so are your returns.
Be sure to check the fund prospectus to see what percentage a balanced mutual fund will hold in stocks, bonds and money market.
As an example of asset allocation of a balanced fund could be 60% in bonds, 30% in stocks and 10% in money market.
Another possible asset allocation of a balanced fund could be 45% stocks, 45% bonds and 10% money market.
This asset allocation is not suitable for all investors, especially younger investors. Younger investors have a longer investment time horizon so the amount of risk a younger investor can take is higher than it is for an older investor.
For example, if a growth fund generates a 10% return in a year, a balanced fund is probably only going to generate a 3 1/2% to 5 1/2% return because there is less invested in stocks.
When interest rates are very low the return on your investment in a balance fund will likely also be low.
In a bad year, a growth mutual fund may generate a negative 10% return and a balanced fund may have a return of something like a negative 3.5% to a positive 2% return.
These are not real returns, just an example of the returns a growth fund and a balanced fund can have in a single year.
In some instances, a balance fund may return more than a growth fund over a twelve month period of time. This could occur when interest rates are at or close to double digits.
Because the asset allocation is fixed the funds expense ratio is lower.
Balanced fund objective
The objective of a balance fund is to provide some growth of capital along with some income.
This type of fund is usually less risky than a pure equity fund.
Balance funds are suited more for people who are older and for people with a low-risk tolerance. Besides less risk people who invest in balanced funds want to outpace inflation.
Less risk does not mean that a balance fund can’t lose money. It can lose money just like any stock or bond fund.
Large company stocks that pay out a quarterly dividend and investment grade and US Treasury bonds can be put together to form a balance fund.
Buying and selling mutual funds
I use Fidelity to buy my mutual funds, but two other recommendations are Vanguard and Charles Schwab. Each of these brokerage firms will have different fees and minimum investment requirements for buying shares of mutual funds.
Mutual funds are not traded during regular trading hours like a stock. Instead, you can only buy or sell shares in them at the end of the trading day.
If you would like to have an investment strategy where it does not depend on your age or risk tolerance check out my blog post titled – What is the best way for a beginner investor to invest in the stock market?
Why do people buy mutual funds that have a load over no-load mutual funds?
The mutual funds I sold as a registered representative had a load. They were the only type of funds the insurance company offered. There are a couple of reasons for people to pay a sales load when investing in mutual funds. Those reasons are:
- you are paying for financial advice
- the sales load is how the registered representative gets paid for selling the fund
If you don’t have the knowledge or the time to learn how to invest in mutual funds you can seek advice from a financial advisor. This person only gets paid when they sell a load fund.
Some advisors are FEE ONLY. That means you pay a fee when seeking their advice.
Buying fractional shares of mutual funds
One thing I like about mutual fund investing is the ability to purchase fractional shares in a fund. For example, if a mutual fund is currently priced at $50 and you only have $25 to invest, you can purchase one half of a share of that no-load mutual fund.
You should now have a better understanding of mutual funds, their advantages and disadvantages, the risks associated with owning them and how and where you can invest in no-load mutual funds with as little as five dollars.
Did you find this information about mutual funds helpful? Please let me know what you think by leaving a comment below. Thank you.
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