Investing in Mutual Funds – Diversify Your Investments
If you are new to the world of stocks and investments, then the words “investing” and “risk” may seem foreign and unfamiliar. However, to truly understand investing, one needs to understand that it is simply the process of putting your money at risk in order to gain something in return. Therefore, investing essentially boils down to two things: risks and returns. Therefore, investing is not only a matter of choosing which stocks to buy, but also analyzing the risk/reward factor of each stock before putting your money on the line.
As an example, let’s assume that an investor has decided that he/she wants to invest in bonds. This investor decides to invest in U.S. Treasuries (the most common form of investing in stocks and bonds). After a few years, the investor plans to retire from his/her job and wishes to cash in on his/her investment. However, does this scenario sound familiar? If so, then probably it doesn’t sound as exciting as it should once the investor has worked out the details of how the bond market works.
When the investor sells his/her bonds, what happens next is called the maturity date. The maturity date is the time frame (in years) during which the investor must resell the bonds if he/she intends to make money on the investment. So if the investor intends to make money, then he/she should hold onto the bond for a minimum of three years after the date of maturity. However, if you intend to just hold on to the bonds, then the three years between the date of maturity and when you plan to sell them makes little difference to the overall value and structure of the portfolio.
How does all of this connect with investing in mutual funds? The simple fact of the matter is that holding periods in bonds can be a very risky move for an investor because of the large potential losses. There are investors who make a significant amount of money by trading in less risky bonds. These investors tend to use the bond market to do their investing instead of the stock market, because investing in stocks comes with a much larger potential loss. Bond investing is thus seen as less risky than other types of investing.
How can you use a mutual fund to invest in less risky assets and still achieve a decent amount of overall return? First, you need to find a company with a stellar performance that is willing to give you a decent rate of return. In order to do that you need to locate a company with a history of consistently generating a high return on investment. Also, remember that in general you will always get what you pay for in this world, so it is important not to choose a fund that charges too low of a rate of return.
When you are investing on your own or in a managed account like a 401k, there are several ways you can diversify your portfolio without taking on too many risks. You can diversify through asset class wise investment decisions, by choosing to include one investment that has a higher risk-adjusted rate of return than the others, and by diversifying through an all-risk portfolio. All of these methods help you to increase your overall safety and at the same time increase the possibility for large profits. If you are unfamiliar with how to do any of these things on your own, you should have a look around online to find some good advice on this subject.