Should we invest in mutual funds?

Hi. I am new to this board and was hoping to get some investment advice. We have just taken 8,000 dollars out of a CD and were thinking about investing it in mutual funds through Fidelity. We are not totally sure how long we will be able to leave the money in mutual funds. It may be 1 and 1/2 years OR maybe 10 years. Would it be a mistake to invest now if we might have to take the money back out in a year or two? If we do decide to invest the money, should we invest right now or wait a few months? We know very little about investing money and have always placed extra money in CD's or money market accounts. However, we met with a financial planner and he advised putting as much as we could in mutual funds. Any help would be greatly appreciated! We are a young family with two little ones and would not want to lose lots of money in the investment process:).

Hi,

As you know, we are in a very volatile market environment, so I would proceed cautiously. I wouldn't put alot of money into stock funds at the moment, since you're likely to invest in a fund only to see the share price jump thereby losing value for you. Bond funds are a safer bet right now, but even those can be volatile. Stick with short term funds and those that have held up well over the past several months. If you are investing for future college expenses for your children, naturally you will be best served in a growth-oriented fund, and you have many years before you'll need the money; however, that being said, I'd still maybe give it a few weeks or months and see if the market settles down a bit. Or, start by investing only the minimum into a growth fund and then add gradually. Mutual funds can be very rewarding, but it takes time and disciplined regular investing. I was always of the 'buy and hold' mentality and it has served me well, but current market conditions are better for short term, more aggressive trading. Also, look for funds with low expense ratios and fees since you'll get to keep more of the money you make. Also, reinvesting dividends and capital gains is an excellent idea. Like I said at the beginning, don't put big amounts into any funds at the moment, except for possibly money market funds. Otherwise, be prepared for some share price volatility at least for the next few weeks or even months. This is probably the buying opportunity of a lifetme, but noone knows how far down the market will go before we begin to see some recovery. Best of luck and be cautious.

Because we know little about investing, I got the impression from our financial planner that Fidelity would make the decisions regarding where to place the money that we invested. Would we be deciding on what type of bonds and whether they were short term or long term? If so, where can I read more about different types of bonds and the different bond terms (I appreciate your advice so much, but am not sure I completely understand some of the terminology)? Also, we have decided to open a Roth IRA with the intention of using the money contributed for our children for college. However, we don't want to put too much into that at this point since we cannot take it out without penalty. With the fidelity mutual funds that our financial advisor suggested, we can take the money out whenever we need it.

Also, when you say this could be the "best buying opportunity of a lifetime", what exactly do you mean? Do you mean that if you buy (mutual funds, stocks, etc.) at the right time or when the economy settle down a little bit? I know...another silly question probably!

Hi ashandri,

Fidelity is simply an investment company and family of funds, like Vanguard, Blackrock, Nuveen, etc. You and your financial planner will still need to make the decisions as to which specific funds, within the Fidelity family, you choose to invest in. Why limit yourself to one particular fund family however? The key to successful investing, especially in uncertain market environments, is diversification. Money spread out among money markets, short/long term bond funds, equity/growth funds, etc. will do better than 'placing all your eggs in one basket'. The type of fund - by its name - will tell you if it concentrates on longer or shorter term assets. Check out the price histories of the funds you are interested in and see how they did during the past year. Any fund that held up fairly well during 2008 should continue to do well going forward. You can find info on the internet about the various types of investments, as well as probably this Kiplinger site. Also, I would imagine that your planner can help you with this as well.

My indication that this is likely to be one of the 'best buying opportunities of a lifetime' refers to the fact that few of us have been where we are right now. You have to go back to the '30s to find a financial crisis of this magnitude. Many equity fund prices are at historical lows. Unless there is to be no recovery in the market - which some deem a possibilty - it is likely that investments made at these low valuations will, over time, rise in value and thus make money. The old adage - buy low/sell high probably was never more appropriate than during times such as this. And yet, some degree of caution is advised since we don't know where the bottom of this market is. We're on a nice rally right now, but many think that the bottom will again be retested. I'm rather more bullish than many folks and would like to think that we're turning the corner on the recession. That being said, though, there is certainly much room for doubt and concern out there what with the Feds and government going into debt by billions of dollars to purchase these toxic debts. I've been investing since the mid-1980's and have never seen a financial situation even remotely like the one we're in now. Many believe that the 'buy-and-hold' approach to investing is no longer a good one to follow. I'd like to think otherwise, since it's served me well over the past 23 years or so. The big thing now is the inverse ETF's that make money in one particular sector when the market is going down rather than up - kind of like playing the 'don't pass' bar on a craps table. Such is not my style. Just keep reading and learning....the only 'silly questions' are the ones people fail to ask. As to 'buying at the right time'...this is referred to as market timing and is pretty much universally accepted as being impossible to do. I've bought shares and then watched the prices continue to go lower. It doesn't bother me, since I know that in the long run I'll come out ahead. Unless 'this time is different', I believe one can continue to make money by being patient and taking a long-term approach. I believe there are other vehicles out there more appropriate for college funding than a Roth IRA - keep in mind that you can't get at that money without a penalty until you're age 55. The big thing now in college funding are 501 plans since you can put more in them than the older Coverdell plans. Also, don't underestimate the power of reinvested dividends and capital gains. Over a long period, this really helps you to overcome the periodical ups and downs of the market and still be able to come out ahead. I have funds whose prices have recently been at 23-year lows and, from having reinvested dividends and gains over the years, I'm still way ahead on some of them. It takes great patience and sometimes nerves of steel to buy shares when things are going down.

ashandri,

I work in finance with many young families and having a young family myself, I can understand your concerns. If you are wanting to have some growth, but you do not want to lose your money, just place the money into a conservative mutual fund. That way the money is growing, but you are not putting your money at risk.

Because of the redemption fees on mutual funds, it can be harder to use market timing to manage the risk in your portfolio. But there are some seasonal influences that can be used to your advantage to help you decide when it’s best to invest in mutual funds, and when to go to cash.

The most popular of the calendar based systems is explained by the adage “Sell in May and go away.” Simply put, you stay out of the market for the 6 months beginning with May, and buy again in the beginning of October. Maybe I could be wrong here. But the studies have been based upon research by some very good financial analysts by studying the trends over years.