If you’re an individual investor, how do you get started? We’ll assume here that you have your financial house generally in order, three or four month’s income equivalent in a savings account or credit union, some readily accessible account, and now you have another small chunk of money that you can invest in some other instrument. My personal feeling is that individual stocks are not immediately appropriate, because of volatility and lack of diversity. Before starting with individual stocks, I would want a minimum ten to twenty thousand dollar base in a balanced or blend type of mutual fund. By the way, this might be part in an IRA or 401k type of account, and part regular taxable account. At this level though, the main objective is safety rather than a focus on growth.
How do you find the appropriate fund? You can do a lot of reading, but you can also look at charts of mutual fund performance. Yes, past performance doesn’t… and so forth, but at this level, you do want an indication the investment company has been around a while.
You can find charts of fund performance in many of the popular magazines; Kiplinger’s includes a tool (look at the bottom of the mutual fund links, “create your own filter” which lets you search for mutual funds which meet certain criteria you select based on one, three, and five year performance. Remember that five years back from 2006 is 2001, and early 2000 was much better, so even five years doesn’t necessarily show the precipitous drop of 2000. Find a chart of the Dow Jones Industrial Average for the last five to ten years, so you have a basis for comparing a particular fund’s performance against the market. You can also look on the web sites of the large fund companies like Fidelity and Vanguard and Janus-Henderson and T. Rowe Price. Generally, with a little effort, you can get a chart of past performance of their funds, usually past quarter or so, past one year, past five years, past ten years or life of fund.
Your objective is to select a fund for relatively steady performance, because until you’re comfortable with the ups and downs of investing, you don’t want a fund that might go down so precipitously that you will be tempted to panic and sell just as it hits its lowest point.
When you’ve found a few funds that seem interesting, do a little more research. Search the web site for the fund’s prospectus, which will show in more detail its past performance, and how much is charged as management fees, and whether there is a charge to invest (called a “load”) or whether it is a no-load fund (the investment companies mentioned above generally offer no-load funds), and what the minimum is for further investments.