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Tuesday, July 28, 2009

The 2 Worst Mutual Fund Mistakes You Can Make

The worst mistake you can make when it comes to mutual fund investing is to procrastinate and tell yourself that you'll look into it later.

You can get started on your own, and you don't need a great deal of financial savvy to get the show on the road and invest in mutual funds (funds). Don't let fear of failure stand in your way. You can start small and play it safe, taking it one step at a time.

Start by opening a mutual fund account with a major no-load mutual fund company like Fidelity, Vanguard or T. Rowe Price. Go to their web site and/or call their toll-free number to get info and an application. Put your initial mutual fund investment in their largest general money market fund.

Now, you're in business with little to worry about. Your money is earning interest and is safe. You can add more money, or pull money out whenever you want at no cost to you. You have plenty of time to learn and formulate your long-term mutual fund investing strategy, and you can always call their service desk if you have questions.

You will get periodic statements from the fund company showing you exactly where your money is and what your account is worth in dollars and cents.

There's a second mistake you should avoid, and it's almost as bad as procrastinating. Don't put much credibility in what friends and neighbors tell you about their experiences with mutual fund investing.

Tens of millions of Americans own funds in their 401k, IRA, or in other accounts. Virtually all of them lost money in 2008 and early 2009, and some of them lost as much as half of their money in a year and a half.

They didn't take these losses because mutual funds are bad investments. They got beat up because they had too much money in stocks ... stock funds ... and the stock market took its worst beating since the great depression of the 1930's.

On the flip side, such losses are rare in mutual fund investing. Most of the time mutual fund investors make money, and those in stock funds make considerably more than they could in safe investments like bank CDs. Don't let anyone discourage you from investing in mutual funds.

From 1982 to 2000 stocks went up about 1400% in value. You could have doubled your money in stock funds in the 5 years between 2002 and 2007, when CDs at the bank were paying 2% to 4%. Making 3% a year it takes 24 years to double your money!

After you have made your initial mutual fund investment, consider moving a modest amount of money to stock funds and perhaps bond funds. Start with the funds that are ranked as "less risky" or as "more conservative" by the literature you received from your fund company.

Take things a step at a time and relax. Do your homework and continue to read articles. Before long you should find that you can invest in mutual funds and make money, as long as you avoid the 2 biggest mistakes.

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