Mutual Funds are no longer an arcane investment tool, but have gained enormous popularity over the past several decades.

As the common investment vehicle used in most employer 401K benefit plans, mutual funds are the investment vehicle of choice by over 80 million Americans, constituting over 50% of available households.

Although the origin of mutual funds can be traced back to the eighteenth century, the modern day version of the fund was given birth in Boston in 1924. From that point on, the concept has grown in acceptability to the point that trillions of dollars are invested in over 10,000 separate offerings managed by both large and boutique fund managers.

The definition of a mutual fund, provided by a trusted Internet authority, is

“An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.”

For beginning investors, these funds represent an excellent tool for learning the basic principles of investing, including diversification, sector focused investing, and delegated management and related cost structures. They also enable an investor with minimal capital to invest in a variety of opportunities that otherwise would be precluded due to financial constraints.

Fund managers have not ignored product development either. Mutual funds now come in a variety of types to meet every investor’s objectives, from industry specialization and various stock indexes to special situations and emerging market funds.

An investor can pick and choose at will, with minimal restrictions on redemptions, and construct a portfolio that matches his personal perspective on the market. Each fund, on the other hand, manages its portfolio based on the specific objectives detailed in the fund’s prospectus.

Fund manager compensation also varies, depending on the type of fund, its stated tolerance for risk, and the sales structure associated with the distribution of fund units. These costs are important since they reduce whatever return you may earn over time.

As with any other well-developed industry, fund purveyors have learned to disguise their actual fees with complex disclosures and layers of financial information. Care should be taken to understand any fees that apply to operating the fund on a daily basis, as opposed to “loads” that are often collected when units are either bought or sold.

For the past five years, many investors have sought diversification and return in global investment funds that focus on specific regions or developing countries.   Oftentimes, another country’s economy is growing more quickly than your own. You do not need to take a forex course to sort through the complex currency exchange fluctuations. Fund managers employ their own fx brokers to handle exchanges, and units in the funds remain in U.S. Dollars.

One restriction, however, that mutual funds possess is that values are determined on an “end-of-day” basis. All accounting and fee charges are performed daily, and a single unit value is then used for all purchases and redemptions.

Some funds may also delay or restrict redemptions if the assets or securities have low liquidity in the market, as with real estate or micro-cap companies. For this reason alone, exchange-traded funds, or ETFs, have gained in popularity since they offer the flexibility of trading on exchanges like shares are traded for any stock today.

Mutual funds have had a stellar history and benefited many investors. However, as one commentator recently stated, “the growing use of ETFs means the future of mutual funds will be anything but smooth.”

This has been a guest post by Jason Hoerr of Forex Traders.

The investing principle known as “invest in what you know” was made popular by investing giant, Peter Lynch. His idea was that even if you are not a professional investor, or someone trained in finance, you can still make wise choices in the stock market. The way that you overcome this lack of training is to implement a stock investing strategy of simply investing in what you know.

How to Invest in What You Know

What this means is that when you are looking for companies to invest in, you should first take a look at what you are already familiar with. For instance, when you go grocery shopping, pay attention to the companies that make the popular items. Purchasing a box of Tide Detergent may lead you to consider an investment in Proctor and Gamble.

The ever-changing desires of children can be a great source of ideas when looking for investments. If a company is able to develop a product and/or marketing campaign that captures the attention of millions of kids, then you can be sure that the wallets of millions of adults will soon follow.

The point is not to see that a new Iron Man movie is coming out and then go and buy 10,000 shares of Marvel. It’s not even to decide that since companies like McDonalds and Disney have been around for a very long time, they must be good investments. But, when you are looking for ways to grow your money, “invest in what you know” becomes great advice.

Invest in What You Know – Protection From Ignorance

The main reason why you want to invest in what you know is to protect yourself from ignorance. If you don’t invest in what you know, you will have a much harder time evaluating the prospects of your potential investments. Investing in a company that you don’t understand definitely can be a huge financial mistake!

This is why I never invested in Lucent Technologies – even though I worked in customer service for their investment bank answering questions for potential investors – but I did invest in Paychex. I was much more familiar with the business model of Paychex, and it was much easier to understand how they operated. However with Lucent, I was (and still am) completely ignorant regarding the workings of telecommunications, and there was no way that I could assess whether they were a good investment.

However, if you happen to work in this field, then you will be much better equipped to evaluate the current and future prospects of Lucent, as well as assess their standing among their competitors.

Many people laughed at Warren Buffettwhen he decided not to chase after every new tech stock in the late 90′s. They claimed that he was missing out on tremendous gains and that his fear was costing Berkshire’s shareholders billions of dollars.  Actually, they were right.  However, this didn’t show signs of Buffett slowing down, or the investment world passing him by.

Here is his explanation taken from his opening speech at the Berkshire Hathaway Annual Shareholders Meeting in 1998:

I don’t want to play in a game where the other guy has an advantage. I could spend all my time thinking about technology for the next year and still not be the 100th, 1,000th or even the 10,000th smartest guy in the country in analyzing those businesses. In effect, that’s a 7- or 8-foot bar that I can’t clear. There are people who can, but I can’t. The fact that they’ll be a lot of money made by somebody doesn’t bother me really. There’s going to be a lot of money made by somebody in cocoa beans. But I don’t know anything about ‘em.

There are a whole lot of areas I don’t know anything about. I think it would be a very valid criticism if it were possible that Charlie and I, by spending a year working on it, could become well enough informed so that our judgment would be better than other people’s. But that wouldn’t happen. And no matter how hard I might train, I still couldn’t. Therefore, it’s better for us to swing at pitches. Different people understand different businesses. The important thing is to know which ones you do understand and when you’re operating within your circle of competence.

If one of the richest men in the world – who has been determined by many to be the greatest living investor – exercises enough discipline to follow the “invest in what you know” principle, then so should we. It should be noted that since he avoided the “dot com” boom, he also avoided the pains that went along with the dot com bust!

Invest in What You Know – Only the First Step

Now before you go throwing all of your money at Yum Brands because you like tacos and fried chicken, there is something else you must consider. These companies that you discover are only potential investments. You still have to do your due diligence!

Investing in what you know only gets you passed the first step – identifying candidates for your hard earned dollars! You have to read their annual and quarterly reports, look at their financial reports, look at their current and future products, evaluate their competition, consider how their industry is being driven by the macro economy, examine various ratios and valuations, etc.

I know this sounds like a lot – because it is – but, by only considering companies that you are familiar with, who have a business plan that you can understand and evaluate, you have an advantage over many who “invest” in the stock market.

photo by adrian8_8

Reader Questions

1. Have you ever put your money behind something that you didn’t really understand?
2. Did you ever invest in what you know, and doing so allowed you to avoid disaster?
   
3. What would you suggest for someone who is trying to learn more about investing?

If you designed the world of personal investing from the ground up, you’d have a very different experience than what we have now.

Modern personal investing came long after what I would call “institutional investing” and “broker-only investing”.

When it came time to offer investing to the common man, the investment firms of the day got to create it, not the individual.

Today I’m going to pick on a few things that I see as problems in the modern personal investing world.

Lack of Control with Personal Investing

The 401K is a great tool. Since it’s creation in 1980, it’s put the power of retirement savings into the hands of the individual.

However, there is a lack of control which still exists that says, “we’ll make it simple and safe for you.” Translation: we’ll give you 5 to 10 investment choices and they’ll all have high expense ratios.

Not good.

And employers went along with this because the investment firms were creating the system. There needs to be far greater control in the employer sponsored retirement plan area.

After all, this is where the vast majority of people are savings for retirement. You’d think that all those people would demand better control, giving them better choice. But it just hasn’t happened.

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Too Much Information

Investing should be simple. Keep costs down, have a long-term mindset, use tax-advantaged accounts when available, and create a diverse mix of investments that meets your own risk tolerance.

But when you turn on Fox Business Channel, or flip through the Money section of your local newspaper, or when you pass the magazine rack, you get the feeling that everyone is a gosh darn day trader except you.

Why is there so much information? Because it sells. The simple investing concepts don’t sell magazines or attract advertisers.

Plus, brokers and mutual fund companies need this overload of information to keep people trading, to keep volumes high, which fattens their wallets with commission checks.

Not Enough Focus on Expenses in Personal Investing

Finally, there is a lack of knowledge and transparency about investment costs. Sure, you can see a few percentages on a prospectus. But what does that really tell you?

We need to see actual costs clearly spelled out on statements and I want to see my expenses when I log into my account online.

What’s wrong with putting the pricing up on the virtual wall for everyone to see? Other industries do it. It’s about time we see the reality of what’s going on. John C. Bogle said, “On balance, the financial system subtracts value from society”. Well, I say enough already.

It’s not all negative. Personal investing has come a long way, and we’re starting to see some of these bad habits being broken. Companies like Brightscope and Vanguard are leading the way. But ultimately, we the individual are going to have to create change with our pocketbooks.

Perhaps we need more free investment advice.

What do you see as a problem in modern day investing? How would you change things?

This post comes from PT of PT Money: Personal Finance. Learn more about investing and see a list of the best online stock brokers on his blog.

This was an original post I did over at ChristianPF - you can check it out in its entirety there.

My wife and I recently built a new home and moved in a few months ago.  It feels good to be done with the process!

There are some good financial lessons to be learned from building a home.  If any of you have done it, you know what I’m talking about.

There’s a lot that goes into building and each step needs to be done in a certain order otherwise nothing will get accomplished!

The same can be said for our personal finances.  We need to have a good plan and make sure things get done correctly, otherwise we’ll be spinning our wheels.

So, here are some lessons learned from the building process and a blueprint for all of us to build our financial house:

Footings

Under every house is a foundation, and under most foundations are footings. Footings are extremely important because they are the basis on which the foundation is laid. 

Improper footings will not allow the foundation to withstand the give and take of the soil.So what are the footings in personal finance?

Giving

A heart of generosity and a willingness to let go of our own stuff to meet the needs of others is one of the footings on which we build our financial house. 

Why? Because God was so generous to us – therefore that characteristic should flow through us as well.

I know what some of you are thinking, “But I don’t have enough money to give” – well certainly there are other things you can give, like time.  But let me ask you – how much have you prayed about your giving?  Have you considered selling things you do have to help meet the needs of others? 

Giving is a critical footing that we must not simply ignore.

Proper Attitude

An attitude of stewardship - not ownership – should be a key footing as well. In other words, as stewards we should desire to make more money, get out of debt, and get our spending under control because we are handling God’s money – not ours.

When we realize that we are to be responsible managers for God’s currency and that our money is simply a conduit of grace, we can begin to have the proper motivation to get a handle on our money.

Foundation

The foundation is the next crucial piece to building a house.  The foundation for constructing a well-built financial house are things like cash flow, emergency funds and a commitment to getting rid of non-mortgage debt! 

Cash Flow

This is simply your income minus expenses. 

Why is this so important?  Because the secret to getting ahead financially is that there is no secret – spend less than you make.  Everything else hinges on this very point.

Emergency Funds

This also is extremely important because inevitably things come up.  Cars break down, roofs leak, furnaces go out.  So you must have the ability to pay for the emergencies without racking up credit card debt.

Framework

Framing is one of the exciting parts of building a house.  You finally get an idea of what the house will be like.  It’s also key because you need the proper beams in the right places to support the house.

Paying off  Non-Mortgage Debt

Credit cards, car loans and the like are mole hills in a garden.  Working hard at getting rid of those types of debts will help free you to give more, save more and invest for your future.

Insurance

Proper insurance coverage is your support beam for your financial house.  This includes reviewing and acquiring proper health, home/auto, disability and life insurance. 

Let’s take for example life insurance.  Unfortunately, there are a lot of misconceptions when purchasing these policies, so you need to make sure you ask the right questions before you buy life insurance.

Exterior Shell – Roof, Brick and Windows

Now this is where building really gets fun and the house begins to take on the character of what you were envisioning when you began the process.

In personal finance the exterior shell would be things like:

Saving for Retirement 

Funding your 401k plan, IRA or Roth IRA is a big step toward getting your financial house in order.  This is the fun part!  Seeing these accounts build up and realizing that you are saving toward a long-term goal is exciting.

Saving for Other Goals

This could be college savings for your kids, saving for a rental home or even your first house.  Having the ability to sock some cash away for these things is a great feeling.

Final Touches

Getting the drywall in and painted, the flooring and carpet in and making some final touches on the inside is when the house comes together and you’re just about ready to move in.

From a financial standpoint some of these final touches may include things like:

Tax Diversification 

This simply means utilizing your investment accounts from the best tax perspective so that you’re not left holding a huge tax time-bomb in retirement. 

You may want to consider shifting your savings around to help diversify yourself from a tax stand point.

Investment Strategies

At the beginning, it’s good to just get saving.  But as you progress and your account balances begin to grow, you may want to re-evaluate your portfolios to determine if you should employ more sophisticated investment strategies to help maximize your returns and minimize losses.

Something to Remember

Building a house is a process that takes time, effort and energy – and things don’t always go as planned.  Don’t get discouraged, and keep plugging away.  The end result will be well worth it!

It’s been a great week!  My first post as a writer went up on Christian PF (see link below).  I’m excited about the opportunity to write for a great site like that.

The markets have been a little crazy this week and there still a lot of talk about our national debt.  The best thing we can do is focus on changes to our own personal situation. 

Anyways, This Week in Personal Finance takes a look at interesting articles, posts and news from the past week in the personal finance arena. 

So give these articles a click!

• NPR takes a look at the decade ahead in jobs - this is an interesting graphic that shows what they project to be the best and worst employement areas.
• The question of giving and tithing is an oft-debated one in Christians circles.  Questions of how much and to whom stir up lots of answers.  Craig from Money Help for Christians looks at a healthy view of Christian giving and tithing.  This is a great, in-depth post on the subject.
• Paul from Fiscal Geek takes a look at 10 Ways to Invest $100 - he covers just about anything you can think of to get you started.
• Miranda at Personal Dividends writes about  6 Things You Should Know About the 2010 Roth Conversion.  This was a very solid post.  For more on Roth Conversions, check out my guest post over at Wise Bread.
• This post from Linsey at Wise Bread was right up my alley – saving money on office supplies! 
• Matt from Debt Free Adventure shares some pretty common ways people get into debt and how to dig out!

Don’t miss out on another post!!  Get Redeeming Riches delivered to your inbox!

R2 on the Web

I’ve recently been “hired on” as a writer over at Christian PF – one of the leading Christian personal finance blogs out there! 

This was a great honor to be asked by Bob Lotich to contribute articles on a regular basis. You can check out my first on called Blueprint to Building Your Financial House!

Also, Tipd.com is a financial news website where users vote up their favorite articles.  My article 6 Ways to Find Free Money received enough votes to be the #1 article on Tipd’s Greatest Hits!  Thank you to everyone who voted for it!

That article was also included at Fiscal Geek’s Perma Friday Round Up and Canadian Finance Blog’s Friday’s Links post.

4 Money Lessons from a Fool was included in One Money Design’s Friday Round Up.

Have a great weekend everyone!!

If you haven’t yet, consider staying current with Redeeming Riches by receiving my posts FREE through email or RSS Feeds here.  Also, follow me on Twitter here.

Friday Finance Round Up is a weekly post that includes interesting articles and blog posts on money found during the week from across the web.

The US Government’s Credit Score – Loans and Credit

This is a scary look at what Uncle Sam’s credit score would look like if we could rate it!

Investing and Money Rules of Thumb – Financial Highway

Great post by Financial Highway for those looking for some rules of thumb to start out with.

10 Attributes of the Perpetually Broke – Bible Money Matters

Pete offers some telling signs of those who always seem to be having financial difficulty.  The last one was particularly insightful.

Weekly Links

This past week was a good one for links.  Here’s a look at what went on:

• Do You Recognize These 5 Roadblocks to Reaching Your Financial Goals was included in Evolution of Wealth’s Sunday Link Rodeo and at JoeTaxpayer’s “Reading My Fellow Finance Writers” round up.

• 5 Ways to Win the Race to Retirement was included in One Money Design’s Weekly Round Up and also included in Buck$ome Boomer’s Journey to Retirement round up.

• How to Save (Potentially) Thousands by Spending $3.99 was included in the Carnival of Pecuniary Delights hosted by Financial Highway

• Should You Buy Accidental Death Insurance was included at Fiscal Geek’s Thursday Round Up

Be sure to follow me through email, RSS Feeds here and on  Twitter here.