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Some people have their money in banks, credit unions and CDs, which are safe places for putting one’s money, but what about the rate of return? To be honest, it’s not that great. These are more of temporary parking places for your money rather than long term storage units. That being said, a very popular investment in today’s financial environment—and perhaps the most popular worldwide—is the mutual fund. Mutual funds are a good thing used properly, but there are downsides to investing in mutual funds that you should be aware of.
A mutual fund is essentially an investment that pools your money together with other investors to purchase shares of a grouping of stocks, bonds or other securities. They are typically overseen by a portfolio manager.
One thing to recognize when investing in mutual funds is that your money can be susceptible to a volatile market. Sure, the rates of return can be much higher than those of a traditional savings account or CD, but this is at the sacrifice of financial security. If the stock market goes down, your money goes down with it.
Not only does your money go down with the stock market when it declines when investing in a mutual fund, but you have to make up even more of it to get back to where you started. For example, if the stock market goes down 25 percent, you then have to realize a 33 percent gain just to get even.
And here’s another fact that you might not know regarding the downsides to investing in mutual funds. If the stock market goes down, and you lose money, did you know that there are certain situations where you still have to pay taxes on gains? If you buy a mutual fund when the market is high, you are buying stocks that have already gone up in that mutual fund. That means when it goes down, you have the losses, but you are still responsible for the gains in the stock when you sell them. You could still have to pay taxes on gains that you didn’t even make if the market goes down.
Another misconception about mutual funds is the idea of diversification. Some investors believe that diversification equals safety, but that is not always true. When the stock market went down in 2008, every major asset class declined, so even investors whose portfolios were diversified suffered across the board. Don’t mistake diversification for safety when investing in mutual funds.
Whether or not a mutual fund is right for you depends on what it is that you want for your money—and your level of risk tolerance. If you are nearing retirement and feel that you want a higher level of safety for your money, then you should consider an investment vehicle that can provide it for you, which is not a mutual fund.
At Ty J. Young Inc., our qualified financial advisors are experts in helping our clients secure their money in retirement while keeping it growing at the same time. Call us today at 877-912-1919 to learn more!