By Prof. John DeSpagna
As you continue on the path to earning your community college degree, you will be preparing for a successful future. A four-year degree, your first job as a college graduate and perhaps a master’s degree are in your future. As you move forward, you will also be striving to generate sufficient financial resources to reach your financial goals. These may include buying your first new home and saving for retirement.
In order to achieve these financial goals, you will need to develop the necessary financial literacy to know how to invest your financial resources. One of the investment vehicles that you can utilize to help your money grow is a mutual fund. Let’s learn a little about mutual funds now to help you in your future.
One of the last things on your mind right now is “how am I going to have enough money to retire?” To reach that goal, you are going to have to save and invest over decades, and you have to be ready to start while in your twenties.
When you start a full time job, you will probably be offered the opportunity to invest in a 401k. This is a retirement plan where part of your paycheck will automatically go pretax into the account. Hopefully, your employer will provide a matching contribution. The money then has to be invested and this is where your financial knowledge of a mutual fund comes into play.
A mutual fund is a diversified portfolio that is professionally managed. The portfolio manager will decide which stocks, bonds or money markets to invest your money into. They will in many cases select hundreds of different positions to invest in. The diversification limits your risk and helps you enhance your rate of return.
The portfolio will also be professionally managed. Just as a CPA has an expertise in preparing tax returns, a portfolio manager has an expertise in managing your money. They will have an extensive background to develop their money management skills, which may include an MBA degree and in many cases a CFA designation. They have to prove themselves in order to reach the position of a portfolio manager. All you to do is make the decision to select a certain mutual fund and they take over from there.
In order to learn more about mutual funds, I would suggest that you take a course in investments or personal finance. The course will help you learn more about how to invest your money covering stocks, bonds and mutual funds. You can also enhance your investment knowledge by reading the Wall Street Journal every day. This is something I did during college and this became a hobby that I turned into a job at Merrill Lynch as a Financial Consultant. The knowledge I attained has helped me in my investing for my future and retirement.
To get started, I would suggest that you look at the mutual fund offerings of some of the most well known mutual fund families such as Vanguard and Fidelity. You can find their information online and take some time to read through the websites. Take a look at the offerings and then select a few that you can research at a resource called Morningstar. Morningstar is located in the reference section of a library and they can give you a brief one-page write up on your mutual fund.
You will also need to keep your portfolio diversified with more than one mutual fund. Select some large, middle and small capitalization mutual funds. You should also keep 20% to 30% of your money invested outside the United States in International mutual funds for further diversification as world markets move in different directions.
Select five different mutual funds and place them into your phone so you can follow them on a daily basis and research them. This will get you started and give you some experience.
Part of the college experience is learning about new things to broaden your horizons and prepare you for your future. You are learning how to think critically and creativity to develop your skill set. Part of this should include developing the requisite financial literacy so you are prepared for the future that awaits you.
John DeSpagna is Chair of the Accounting and Business Administration Department at Nassau Community College in Garden City, New York.