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Mutual Fund Basics

By Ali Jaffery

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If you are like most people, stock picking is probably not for you. You want to put your money somewhere and let someone else deal with it. Well, you're in luck thanks to one of the greatest investment vehicles ever devised...the mutual fund. A mutual fund company pools your money with money from hundreds or thousands of like-minded investors and invests it for all of you.
Professional managers decide what investments are the best ones to be into and out of. It's like hiring your own investment advisor at a tiny fraction of the price. You also get a diversified portfolio without having to invest a lot of capital. Most mutual funds require only a $1000 initial investment. Some have no minimum investment. Add it all up: diversification, professional management, small capital requirement, and typically low fees and you have an investment that can't be beat for the basic investor.
How much can you make in a good growth mutual fund? The answer is quite a bit with the right fund. Here is an example: the year is 1950, you are 26 years old, and you have managed to scrimp and save $10,000 for retirement. You have decided to put that into a growth mutual fund and let the income and capital gains reinvest. For this illustration we will use the American Mutual Fund since it started in 1950. You put the money in and you even paid a commission.
At first you didn't do so well; if you were a short term investor you probably panicked when your investment dropped below $9,000 and sold out a few months later. Not you, though, you got in for the long haul and hung in. At the end of 1951 you have a pretty good profit. By 1955 you've doubled your money.
Should you sell now? No, you ride it out. In 1956 your money triples, in '57 you lose some, but you're still ahead and ignore it. You have almost 4 times your investment by the end of 1959.
Then during a bad market in 1960, you make nothing. By '62 you have 6 times your investment and then proceed to lose nearly $15,000 in the bear market of '62-'63. It's tough but you stick it out and by the end of 1964 you made back the lost $15,000 plus another $10,000. By 1966 your $10,000 has grown to over $80,000; by '67 it's nearly $100,000.
It's 1978; you now have over $200,000. You still have 10 years until retirement and feel like you're doing pretty well. But you ain't seen nuthin' yet. 1979, '80, '81, '82...flat for a while but wait, '83...now you're at over half a million. '84 could have been better. Things pick up in 1985, '86. The fund soars in '87,crashes, and settles back in '88.
All things considered you've done well because on Jan. 1, 1989, the year you turn 65, you have over one million dollars and you never invested another penny of your own money. This illustration doesn't take into account taxes on the income and capital gains, but even after that, you'd still have an awful lot of money--much more than the nearly $71,000 you'd have had (before taxes) had you kept that $10,000 in a savings account.
In this scenario, we deliberately omitted the incredible growth of the nineties. While the eighties were quite good to equity investors, adding the nineties to these figures would have made them look far too good. This might give some people unrealistic expectations (okay, the million dollars would have more than doubled again by the end of 1995).
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