Is Now a Good Time to Invest?

The right time to get back in the market may be just around the corner. With global economies sinking, sometimes dramatically, it can be a scary thought to put your hard-earned money on the line. However, a smart investor will realize that golden opportunities are appearing if proper research is done.

If you look at a long-term chart of the Dow Jones average, you will see that it is currently at some of the 2002-2003 levels. It has dropped dramatically since the financial collapse of 2008-2009, but it is still in familiar territory. It may take another two years or more for a large upswing in the markets, but at least we hope that the Dow will not drop below 7,000 points. That may bring hope and some peace of mind about starting to invest again.

Dollar Cost Averaging

The concept of Dollar Cost Averaging comes to mind in the current market situation. It is the process of buying stocks or similar investments on a regular basis, such as once a month, using a fixed amount of money. When prices are low, you are able to buy more shares. When prices are high, you buy fewer. In this way, you are able to take advantage of temporary low prices. This is especially helpful for long-term investments, such as retirement accounts. It may go against human nature to buy stocks when everything is falling and red but in fact it can lead to a bigger payoff if done correctly.

Don't Wait Too Long

As soon as you believe the markets will not drop much more, that is the time to start investing. When an upswing begins, it may happen so fast that you will miss a good portion of it. There are literally billions of dollars of cash on the sidelines, just waiting to go back into the market when the time is right. You can imagine what impact that might have on prices because of a surging demand but limited supply of stocks and mutual funds. Don't wait too long!

Which Companies to Buy

There are a lot of low-priced stocks right now. Don't jump into any old stock just because the price is low. There may be good reasons for it, such as the company being dangerously close to bankruptcy. One popular example is GM. Their stock price has dropped incredibly far. Is it a good deal? The government will probably not allow them to go into bankruptcy because that could have catastrophic affects on the country. Even if they survive, though, they may not thrive, and the stock price might hold its value or drop even more. Nobody can predict the future of GM. This is just an example of how difficult it can be to make a trading decision at the present time.

You also need to consider how the company is adapting to the economy. Are they offering low-price items to their customers? Are they reducing expenses significantly, such as layoffs, to stay in business? Do they have access to enough credit to stay operational? These are very important questions to consider before making a trade.

Will the Economy Get Worse?

This is probably the single most important factor that traders are considering right now. Why put your money into investments if they are just going to drop again? The government is trying hard to stabilize the economy, but there are many experts who believe there is more doom and gloom in the future, with more foreclosures, bank failures, and lost jobs on the way. A lot of this depends on how the government handles the situation and how the public perceives their actions. If the public believes things are stabilized, they will begin to spend and invest again, businesses will have more money and they can hire more people, and the economy can begin to thrive again. When this will happen, nobody knows for sure. Hopefully in 2009 it will, but it may be 2010 or later.

6 Tips on How You Can Cope With a Market Decline

Many people believe we are in the midst of a bear market that conjures up fear of the Great Depression. Markets go up and they go down. You can't control the market but you can control your reaction to market declines. Here are 6 tips on how to cope with a market decline:

1. Make sure that your portfolio was designed for your investment goals -not for how it reacts in up and down markets because that is an unknown.

2. How much time you have to meet your goals will help you consider what to put in your portfolio. The longer the time horizon; the more risk you can take.

3. Your risk tolerance should be assessed. If you panic when you lose 10% of your investments, then a portfolio of more risk adverse vehicles would be more appropriate. Keep in mind though that you may need to invest for a longer time if you take less risk.

4. If your financial circumstances haven't changed, then stick with your long term plan no matter what the economy is doing. Studies show that long term investing always gives a better return than darting in and out of the markets. Taxes and fees magnify your losses every time you trade.

5. Don't look for short term fixes like selling everything and waiting till things get better. Things may get worse before it gets better but you will be guessing as to when it is the right time to get back in. You could miss out on the recovery.

6. For long term investors, it's a great time to be buying. You can start by dollar cost averaging which is buying shares consistently over time so that your average purchase price is lower.

Three years after the bear market of the 1970s, a $10,000 investment in the S&P 500 Index would have grown to $45,098. In five years after the bear market of the same period, a $10,000 investment in the S&P 500 Index would have been worth $85,605.

Don't let emotions let you stray from the facts. Your investment goals, time horizon and risk tolerance should drive your investment decisions, not the daily news or financial television networks. Cope with a market decline by having an investment plan that you are comfortable with and stick with it. Your financial future depends on it.

Investing and Teenagers

Investing and teenagers sounds odd but where do children learn about money? From their parents, so the teen years are a great time to learn not only about money but investing that money.

Investing for long term and short term goals - most teens know they want a new car or a college education or even a business of their own. In order to meet any of these goals they will need money. Let them be aware that most of the time their income will not be enough for them to meet their financial goals and they will have to learn how to invest.

Of course you will have to be in charge of their accounts, since they legally can't have one until they are 18 years old. The alternative would be a trust that invests for them. This is not what most teens really want when learning about investments. They want to be a bit more hands on, so set up the account and let them learn to make the decisions. Teach them about buying stocks and how to reinvest their earnings.

Teach them about 401k accounts and IRAs that will be part of their future as they look towards retirement. Explain how your account works for you including how much you hope to have when you retire. This will help them understand that today's value of a dollar isn't necessarily tomorrows. This will get them to realize lots of things when it comes to money.

Together decide how much of a return on their investment they are going to need to meet their goals. Do the math with them and make sure they understand how much of their weekly wages from a job they are going to part with. They have to understand that in order to meet their goals they will give up something now to have more later on. This isn't a savings account that they can withdraw from if they need something next week.

Once your teen has their account set up watch the difference it makes in their approach to spending. They will begin to track their investments and will eagerly calculate how much money they are earning each day or week. This will teach them about being responsible as well as how to plan for their future. When their goals are not met they will figure out new strategies with you.

Explaining the Ponzi Scheme

Every time I hear about Bernard Madoff and his arrest, this term is always attached to his name: the Ponzi scheme. Who or what in the world is that? But before that who is Bernard Madoff?

Bernard Lawrence Madoff is an American businessman and former chairman of the NASDAQ stock exchange. He founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960. His firm was one of the top market maker businesses on Wall Street. In fact, it is the sixth-largest in 2008. Madoff was also a prominent philanthropist serving in several non-profit organizations and funding research studies specifically about lymphoma (his youngest son was diagnosed with lymphoma).

Madoff was arrested after investigators said he confessed to his sons that he had swindled investors of a mammoth Ponzi scheme in which early investors are paid with money raised from new investors. The scheme collapses when there is no money to repay the last investors. Madoff allegedly took $50 billion dollars of his investors' money.

So now, back to my first question, what is a Ponzi scheme?

According to the US Securities and Exchange Commission, a Ponzi scheme is a type of illegal pyramid scheme that pays returns to investors from their own money or money paid by subsequent investors rather than from profit. It usually offers abnormally high short-term returns in order to entice new investors. A Ponzi scheme usually has this "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

The scheme was named after Charles Ponzi who became infamous during the 1920's as one of the greatest swindlers in American history. He was able to earn money quickly by using a vagary of the postal system. In those times, it was common for letters abroad to include an international reply coupon -- a voucher that could be exchanged for minimum postage back to the country from which the letter was sent.

As explained in cnn.com, Ponzi started buying and selling postal reply coupons using agents in his native Italy. Unfortunately, he got greedy so Ponzi started to recruit investors into his system with the promise of 50 percent returns in just a few days. Investors would pay their cash in, and sure enough, Ponzi would get them the promised return.

Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for this foolproof investment strategy and Ponzi was pocketing millions raking in $250,000 a day. He became a celebrity investor, almost like the Warren Buffett of his day.

Soon enough when financial head Clarence Barron looked into his business and realized that the whole thing was a scam, Ponzi's business started to fall into pieces. Though many did not believe Barron's report, Ponzi eventually went to trial, pleaded guilty and served jail time. Upon his release, Ponzi was deported back to birth country Italy and spent the rest of his life in poverty. He died in Rio de Janeiro in 1949.

As to why Bernard Madoff did what he did...that's a question many people would like to hear him answer. Many lives were affected (and perhaps ruined) by his 21st century Ponzi scheme. But whatever Madoff's reason is, his victims (if proven guilty) deserve all the justice they can get.

Earn Money Online Without a Website!

Statistics show that eBay auctions generate around $86 million everyday, coming from its 2 million users that visit the website in a span of 24 short hours. These eBay users either buy products from online stores because they can't find these items in local stores, or sell items that they do not need anymore.

Of these 2 million eBay users, 430,00 of them do not own real shops. Instead, they run their part time or full time eBay business right from the comfort of their own home. What's more, there are even people who actually sell huge deals on eBay, like computers, cars, and even real estate. You, too, can be this person. You can setup your own eBay business from home, and you can start by selling various items that you don't need anymore.

Success in an eBay business starts with a few basic things that you must first learn about. First of all, the products that you are going to sell should be something of interest to you and your target market. Also, you need to consider where you are going to get your supplies, and that is through finding a legitimate wholesale supplier. You also need to know how to setup your own eBay store. These three things are the basic stuff that you need to know to maximize your business profits.

Contrary to what most people believe, you don't have to have a very large capital in order to start your eBay store. You also don't need to have lots of storage space in your home. Now that there are already dropshipping companies, you don't really have to find a spot in your house where you can store your stocks. For example, you have set up an auction in your eBay store. When the auction ends and you already have your winning bidder, you can just ask the wholesaler to ship the item directly to the winning bidder. That is how dropshipping works. You save both time and effort, since the only thing that you need to think about is how to promote your store. All the other stuff is the responsibility of your dropshipper.

You must know however that not all dropshippers can be trusted. Just like any other business venture, you have to be cautious in dealing with other people in the business. Beware of unreliable dropshippers, because not only will your profits suffer, you reputation as a seller might receive a blow as well. Remember, dropshippers are not supposed to middlemen, and anyone who claims otherwise is a scam. Don't be fooled by companies saying that dropshippers should share your profits. True, they have fees, but those fees are just small ones. Examples of good wholesale directories that you can try are Salehoo and The Ultimate eBay Dropship Power Park.

Money Markets vs Certificates of Deposit - Which to Choose?

Deciding between money market accounts and certificates of deposit is a matter of determining the length of time and level of security you desire when investing. Both forms of investing can be very beneficial to your assets, but they satisfy different goals. Therefore, to decide between them, it is important to determine your goals.

Let's look briefly at some goals you may have in mind:

Long-Term Savings - If you're looking for a way to invest that can guarantee the amount of funds at maturity then certificates of deposit are probably the best way to go. They are debt instruments that are issued by banks or other financial institutions in exchange for money paid by an investor. The CD is given for a predetermined amount of time with a fixed interest rate until maturity. The trade-off in this is that you may not have access to your money for a while, anywhere from weeks to years. However, if you're not interested in having access to your money (and like investment growth) the CD is a good option.

Easy Access to Funds - If you are looking for an investment tool that allows you access to your funds whenever you want them then money markets would be a better choice. You can open your account at most any financial institution, from which you should receive a checkbook that will give you the ability to regularly invest in the form of purchasing stocks, bonds or mutual funds. Also, you can deposit cash easily in these accounts.

If you're still not sure of which route to take, here are some other ideas to keep in mind:

• Certificates of deposit are FDIC insured up to $100,000, much like money in a savings account; however, if you decide to opt for a longer maturity period (and higher interest rate), you may have to wait a very long time to access your funds.

• Money markets tend to keep their share price right at $1 per share, which works out nicely for some; however, if you want to take advantage of interest rate maturation you will have to deposit more money instead of waiting over a period of time like with CDs.

Making the decision of what you should do with your cash can be a tough one. But with certificates of deposit and money markets both clearly offering unique perks, your biggest job will be to decide which goals are most important to your investment future.

Index funds - Introduction

Mutual funds are without a doubt the most significant invention of the 20th century as far as the small individual investor of modest means is concerned. Thanks to these mutual funds, the benefits of the international capital markets can now accrue to the vast majority of the population and now just the wealthy elite. A special type of mutual fund, called an index fund, represents an important evolution of the mutual fund model, allowing small investors to benefit even more than before.

What Is An Index Fund?

An index fund is merely a mutual fund that seeks to track the performance of a broad market index such as the S&P 500 or EAFE. Unlike traditional mutual funds, an index fund doesn't attempt to outperform the market by making shrewd purchase and sell decisions. Why not? Because as it turns out, most traditional mutual funds fail in their goals to beat the market. As a whole, index funds tend to outperform most non-index mutual funds for a variety of reasons.

Why Do Index Funds Outperform?

The main reason index funds tend to outperform traditional mutual funds over the long term is their very low cost, expressed as a low expense ratio. Since an indexing strategy doesn't need an expensive manager and cadre of research analysts, these funds have an immediate cost advantage of 0.5%, 1%, or more over other funds. As it turns out, a 1% head start is nearly insurmountable in the world of investing: sure, some will manage it but how do you know which ones in advance?

Where To Buy Mutual Funds?

Most of the large fund companies now sell index funds, but not all are created equal. For my money, I consider Vanguard to be the best of the best when it comes to index funds. Vanguard is inexpensive, customer-focused, very easy to deal with, and doesn't charge any transaction or brokerage fees. In fact, you could make a good argument that Vanguard is the only company you need use at all.

Tips For Finding a Hard Money Lender

Since "hard money" lenders don't have storefronts like banks or finance companies, how do you find one? They're usually not listed in the phone directory under "hard money lenders". But they may be advertised in the classified section of the newspaper or online as "private lenders".

Hard money lenders are usually private individuals who have access to large amounts of cash. The easiest way to locate them is to start making inquiries to accountants and attorneys who have a wealthy client base. Often you can locate people who have experience making private loans. Of course, these people are the easiest to do business with since they already understand the process.

Attorneys that handle real estate closings are a good resource, especially those who have clients with large estates or trusts with real estate holdings. Often, these people are happy to discover a relatively low risk investment that can give them a return of 10% or higher.

Because these private loans are highly collateralized (30% or more down payment or equity is required), they're considered to be low risk. When compared with stocks or bonds, which have no hard assets as collateral, a private money loan becomes very attractive as an investment.

Accountants may also be a good resource if they have a wealthy clientele. Clients with large amounts of cash available are always looking for good investments. And again, if you can find people who have successfully loaned money before, it can make the process of structuring a new loan very simple.

Accountants are also in a position to educate their clients on the value of lending money as a business investment. Their clients already look to them for investment and tax advice, so the relationship of trust is already established. The accountant can evaluate the loan terms for the client, and add reassurance about the soundness of a private loan as a good investment vehicle.

But if the thought of approaching attorneys and accountants doesn't appeal to you, there are other ways of discovering who's in the private money lending business in your county. The names of private money lenders will appear on the recorded loan documents.

This can take some time to research, but you can easily weed out the names of large corporate mortgage companies like Wells Fargo or Bank of America. Most of the remaining names will be private lenders.

Last but not least, talk with real estate brokers who work with other real estate investors. Real estate brokers usually have a large network of resources available. And some brokers are even in a position to lend private money themselves.

7 Best Mutual Funds For 2009

As our economic outlook continues to be poor and as the stock market is in turmoil, stock investing has become increasingly difficult. Maintaining a solid investment portfolio can be hard work. One alternative to the difficult work of stock selection is to invest in mutual funds. With thousands of mutual funds to choose from, how can you tell which ones are the best?

That's why I have compiled a list of the 7 Best Mutual Funds for 2009. After researching the performance, stability, and income of hundreds of top-rated funds, I found the best mutual funds to invest in for 2009 and beyond.

Income-Dividends

One part of my selection process was to find mutual funds with cash flow, either through dividends or bond interest payments (in the form of dividends for mutual funds). This factor is becoming ever more important during a time when stocks continue to decline. Through dividends you can know that you will have an income of the yield percentage.

Future Trends

Another selection criteria was to find mutual funds that are going to perform well for years to come. As you will see, I have included a mutual fund that invests in stocks of alternative energy or "green" companies. The whole environmentally-friendly, green movement is just getting started and will be a boon to the economy for the next 10-20 years. One aspect that is somewhat more of a near-term strategy is the gold focused fund because of the predicted rise in the price of gold over the next year or two.

Long-Term Performance

The last and most important selection criteria was the long-term performance of the mutual fund. Any one stock or mutual fund can perform well over one or two years by luck, but it takes true skill to manage a portfolio that has good returns over a ten year period. A major failure of many investors that buy mutual funds is that they chase the fund that is currently performing the best or just recently had its best year. If the mutual fund is having an unbelievably great year, then either stay away from it because it's too late or sell it if you own it.

The 7 Best Mutual Funds for 2009:

1. American Century High-Yield Fund (AHYVX)

- With the current state of the economy, your best bet for making money is finding an investment with a stated income (i.e. dividends, bond interest payments). American Century's High Yield Fund has a dividend yield of 9.38%, which is much larger than most high yielding mutual funds or stocks.

2. The New Alternatives Fund (NALFX)

- this is the perfect mutual fund for times when people and companies are looking for environmentally-friendly ways of doing things. This mutual fund invests in companies that focus on renewable energy sources, as well as companies that are concerned with energy conservation and environmental protection. Over the next decade green and alternative energy stocks will most likely sky-rocket with gaining popularity and necessity.

3. Franklin Utilities Fund (FKUTX)

- A utilities fund is also a great way to get a flow of decent income during a time of poor stock performance. This mutual fund has a dividend yield of 4% and a 10-year annualized return of 5.17%, which is very impressive. Utility companies are a solid investment for having a stream of dividend income.

4. ING Corporate Leaders Trust Fund (LEXCX)

- Although its 10-year annualized return has been hurt by the recent stock market downturn putting it at 3.67% (which is better than all but two main value strategy mutual funds), ING's fund has performed 10% better than the S&P 500 over the past year. It also has a dividend yield of 2.46%.

5. Franklin Gold and Precious Metals (FKRCX)

- This mutual fund has been a top performer over the past decade with a 10-year annualized return of 14.42% and a current dividend yield of 8.34%. This mutual fund has performed amazingly, and it will continue to perform with gold becoming more of a flight-to-safety investment for investors.

6. Vanguard Energy Fund (VGENX)

- although the commodities boom of earlier this year has faded, oil prices will come back. It is only a matter of time. Vanguard's Energy Fund has had a 10-year annualized return of 14.81%, which is better than most mutual funds of any kind. It is positioned to perform well over the next few years.

7. Municipal Bond Fund (of your choice)

- municipal bond rates have gone up in recent months and continue to be a great source of extra income. For example, some bonds in Florida are paying 6% a year in interest. Remember with municipal bonds that interest payments are tax-exempt; just make sure you pick a bond that is within your state (otherwise interest payments become taxable). How does a tax-free income of 5% or 6% on your investment sound for 2009- with the U.S. still in recession?

Iron Condor Option Trading - An Introduction

Iron Condor Defined

An Iron Condor is an option spread trade constructed from two other separate spread trades - a bull put spread and a bear call spread.

Briefly:

• A bull put spread is a neutral to bullish trade. It's constructed by selling, or writing, a put at one strike price (presumably below the current share price) and then purchasing a second put at a lower strike price. Since the put you sell costs more than the put you buy, the transaction results in a net credit. This net premium income is your maximum gain and is yours to retain in full as long as the stock closes at or above the strike price of the initial put you sold. Since the put you purchased acts as a hedge, your maximum loss is the difference between the two strike prices (multiplied by 100 since each contract represents 100 shares of the underlying stock) less the net premium you originally received.
• A bear call spread is a neutral to bearish trade. It's constructed by selling, or writing, a call at one strike price (presumably above the current share price) and then purchasing a second call at a higher strike price. Since the call you sell costs more than the call you buy, the transaction results in a credit. This net premium income is your maximum gain and is yours to retain in full as long as the stock closes at or below the strike price of the initial call you sold. Since the call you purchased acts as a hedge, your maximum loss is the difference between the two strike prices (multiplied by 100 since each contract represents 100 shares of the underlying stock) less the net premium you originally received.

The iron condor combines these two trades, collecting net premium income from two sources instead of just one. In effect, the iron condor sets up a predetermined trading range with boundaries on both the upside and the downside. If the stock closes within that set range at the time of expiration, the maximum gain is achieved which, on a percentage basis based on the total amount of capital at risk, can be quite lucrative.

An Iron Condor Example

[note: for simplicity, commissions have been excluded from the example that follows.]

Suppose XYZ is trading at $35/share and you don't expect the stock to move much higher or lower in the near term. You choose to set up an iron condor spread trade where all options will expire in one month.

You simultaneously sell a $32.50 put for $1 and purchase a $30 put for $0.50. Since each contract represents 100 shares of underlying stock, that means you collect $50 in net premium. This constructs the bull put portion of the iron condor.

At the other end of the trade, you simultaneously sell a $37.50 call for $1 and purchase a $40 call for $0.50. Multiplying each contract by the 100 underlying shares which it represents, you collect an additional $50 in net premium. This constructs the bear call portion of the iron condor.

You have collected $100 in net premium. As long as XYZ closes anywhere between $32.50/share and $37.50/share, all options will expire worthless and you will achieve your maximum gain of $100

Your maximum loss occurs if the stock closes at expiration either at or below $30 (the maximum loss on the bull put portion) or at or above $40 (the maximum loss on the bear call portion). The maximum loss for the iron condor is the difference in the strike price of either the bull put or the bear call times 100 (per contract - the number of shares a contract represents) less the total amount of net premium received.

In the example above, the maximum loss equals $250 (the difference between the strike prices of either leg) less $100 in collected net premium, or $150 total. Even though you have two legs set up, because the stock can't close both above $40/share and below $30/share, the maximum loss is limited to the strike prices of only one leg.

Conclusion:

Iron condors can be a great way to earn high rates of return on range bound stocks. They are not without risk, however. An individual trader considering iron condors is advised to conduct additional research and consider all the risks involved before placing the trade.

Key Dates in Gold Price History

Through all of the turmoil that the world has gone through, the price of gold is one thing that has largely remained the same. Gold, which was originally used as a form of legal tender, both in the U.S. and international marketplace, is now more widely used for investing rather than actual purchasing, so its value has changed drastically over the years. For many, gold is a commodity that is more valuable as a collection than an investment or any other type of use.

The gold rushes of dates past greatly changed the value of gold throughout those times, making anyone who mined for it a rich person very quickly in many cases. During the 19th century, there were different gold rushes that helped the gold mined towns and areas turn into booming cities overnight because of the influx of pioneers and immigrants that came to mine the gold. Cities were born and still stand tall today that were created out of the gold rush, including San Francisco and Melbourne.

During the 20th century, gold prices were determined by a method known as the gold standard. This meant that currencies in many of the western countries were attached to the price of gold, and in 1971, the U.S. government removed the U.S. Dollar from the gold standard. This left gold to find its own price on the free market, and it became more valuable and useful for investing than it had ever been before. In 1980, gold reached a record high value at the time on the market, when it was priced at $850 per ounce. This created a boom for investors who wanted to cash in on their investments, but also didn't last for long.

The price of gold gradually declined from that point, bringing it to an all-time low since taken off the gold standard of just under $253 per ounce in 1999, which had never happened before. After September 11, 2001, the markets changed drastically, and gold has been gradually rising back up in price since then. In 2006, the value of gold reached about $715 per ounce, which was another high point for the precious metal. Gold then reached an all time high again on March 17, 2008 at $1023.50 the first time ever over the magical $1,000 mark.

It remains to be seen what will happen to the price of gold since the United States has taken an economic downturn and is heading into 2009 in facing huge financial bailouts from the government. However, many people don't actually value the gold for what it is worth, and collecting rare gold coins can often prove to be much more lucrative than actually investing in gold and keeping up with the markets.

You can invest in gold today without even having to get your hands on any of it, which often makes it a great addition to any investment portfolio. However, like any stock, although it has remained fairly steady through the years, it is still subject to its ups and downs, making it a moderate risk for investors of all types.

Definition of Mutual Funds

The definition of mutual funds is the pooling of investors cash to buy securities. The most common types of securities purchased are stocks, bonds, and cash instruments. Currently, there is over 26 trillion dollars of investors money in many types of funds.

Individual funds are not limited to just stocks, bonds, and cash. Many funds pool money together to invest in real estate, gold, and other investments. Before mutual funds came along, these sectors were really hard and not worth investing for an individual investor.

Mutual funds can be separated into two categories, open-end and close-end. Open-end funds allow investors to be in and out of funds at any time with no fees or sales load. A close-ended fund has either a fee and or a sales charge for buying and/or a fee or a sales charge for selling.

Even though the definition of an open ended fund allows you to go in and out of the investment with no sales charge, both types of funds still have other ways in which they make money. The most common fee is an expense ratio, which can be found in the fund's prospectus. Expense ratios can vary widely, so make sure you do your proper homework before investing.

Each mutual fund has a manager, which directs the investments. Typically, the manager of each fund will have a specific purpose for the investments. For example, one fund's purpose might be outpacing a benchmark index, like the S&P 500, using growth stocks. Another funds purpose might be to provide a steady income during retirement using dividends stocks and bonds. Today, there is a fund for just about every time frame and risk tolerance imaginable.

Mutual funds allow an individual investor an easy way to diversify. Imagine the struggle of investing in the top 500 securities in the U.S. by yourself. Not only will your trading fees by outrageous, but also the paperwork and taxes would be too much to handle for the individual investor. It would be a full time job!

The popularity of mutual funds has risen for good reason. They allow you to get a professional manager for your investments for a very low cost. Another advantage that mutual funds give to investors is the ability to invest in markets that were previously unavailable. For example, without mutual funds international investing would be very complex for an individual investor.

Mutual funds are here to stay. There simplicity has many advantages to the individual investor. If you're looking for more then just a definition mutual funds, read this Mutual Fund Guide. It will answer many questions that beginners have, including where and how to get started.

Timing the Markets

With stock markets battered by the credit crunch and resulting recession many investors are trying to gauge the best time to re-enter the market and/or boost exiting positions. But is it really possible to determine the bottom before it becomes history?

Überinvestor Warren Buffett declared he was going bargain hunting last October (2008), but markets subsequently fell further. In Great Britain the real estate market bucked predictions by rising 1.9% in January (according to major mortgage lender, Halifax). Has longstanding pent-up demand caused the market to bottom early, or is it a mere aberration in the continuing downtrend predicted by economists?

Who knows? And that's the key point in attempting to time markets. Without the benefit of hindsight it really is impossible to determine optimal entry/exit points.

In his modern classic, The Black Swan, Nassim Taleb points out that in the 50 years prior to writing the 10 days with the biggest moves contributed 50% of the returns. You'd only need to be out the market 10 days out of 50 years to be down 50%!

The only rational conclusion is that you simply cannot afford to be out of the market, because there's no way of knowing when those most influential days are going to be. A 50% difference in capital represents a hell of a difference in the quality of your retirement.

Dollar cost averaging might be one of the oldest strategies in the investing handbook, but it's one that stands the test of time. Basically it means you invest a certain amount at frequent intervals, e.g. on a monthly basis. The idea is that when stocks are cheap your purchase buys more, and when they're expensive it buys less. The simplest way is through a low-cost tracker fund or ETF.

You can tinker with it if you like, e.g. investing more when you feel markets are cheap, and abstaining when they seem expensive. But whatever you do, don't withdraw from the markets altogether, lest you miss one of the 10 ultra-significant days of this half-century.

Mutual Fund Disadvantages

If you're new to stock market investing you may have heard that mutual funds would be a good way for you to get started. That's actually good advice, but mutual funds have their own pitfalls to watch out for. Here are some of the things you need to know about the disadvantages of mutual fund investing.

First, many people are under the impression that mutual funds have a lower risk than investing directly in stocks because they are managed by professional fund managers. That's not necessarily true, because the fund's performance will ultimately be determined by the experience and expertise of the fund manager. So if the fund manager is good at her job, the fund will do well. If the fund manager is inexperienced or just lacks talent, the fund could perform poorly.

That means you still need to perform your own due diligence on the fund itself, and on its manager. And you'll still need to monitor the fund's performance over time. It won't be something you can purchase and then ignore, and still expected to prosper.

Next, you will still have to take responsibility for diversifying your portfolio. You can do this by choosing a fund that purchases stocks in a wide variety of sectors, and is widely diversified across the market. Or you can invest in more than one fund if each fund specializes in a particular sector. But you will still have to become knowledgeable about investing in the stock market at some point, in order to make good choices about diversification. Otherwise you run the risk of over-diversifying and canceling out your profit, or under-diversifying and losing the risk-reducing characteristics that mutual funds can provide.

Another disadvantage of mutual funds is the cost of the management fees. Typically, there will be fees assessed each time you buy and sell shares. In addition, there are usually yearly management fees to offset the cost of the built in stock market research and the fund manager's salary.

And there's one more disadvantage that most people don't think about. Mutual funds are usually marketed as being more liquid than owning individual stocks. Generally, it's easier and faster to draw cash out of a mutual fund than it is to trade a stock. But that liquidity comes at a cost to the yield of your investment. In order for the fund to have the liquid cash available for quick and easy withdrawals, the cash cannot be invested in additional stocks (and earning money). So the cash liquidity of the mutual fund comes at the opportunity cost of investing in more stocks.

Despite these drawbacks, mutual funds may be a good investment for you. Just be sure to investigate the issues listed in this article in order to make an informed decision.