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Dave Says: Are Mutual Funds a Good Investment?

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Dear Dave,

I’d like to start investing in mutual funds, but I have no idea how they work. Could you explain about them please?

Jennifer

Dear Jennifer,

First of all, don’t rely solely on my answer here. You should never invest in anything you don’t fully understand. Before you do anything else, sit down with a good mutual fund broker, someone who has the heart of a teacher, who will help you find what’s best for you and your specific situation and goals.

Simply put, a mutual fund—if it’s a stock mutual fund—is a group of 90–200 stocks. If it’s a growth stock mutual fund, then it’s a group of 90–200 growth stocks. Analysts buy the stocks they think will increase in price and sell the stocks they feel will go down in price. When the analysts buy growth stocks, it turns it into a growth stock mutual fund. If they buy bonds instead, it becomes a bond mutual fund. Several people put money into these groups, and that’s where you get the name “mutual fund.” They’re mutually funded.

These types of investments are much safer than single stock investing because your money is spread across several different stocks. Plus, you’ve got people who know what they’re doing picking the stocks. My advice would be to take a hard look at mutual funds that have been out there for 10 to 20 years and have a good track record for a long period of time. I have one that has been open since 1934, and that kind of longevity and stability gives me confidence that over time they’ll be just fine!

—Dave

* Dave Ramsey is America’s trusted voice on money and business. He’s authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

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