Red Pill Money: Buying a Mutual Fund

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Once your investments build up and women realize you have money, expect them to start coming out of the woodwork – don’t let them in your wallet

One of the best strategies for investing when trying to balance growth and security is buying mutual funds. Mutual funds are typically safer investments than individual stocks because your money is diversified, with the fund professionally managed and invested in several companies rather than just one. This reduces risk of losing money should one company take a dump.

There are good mutual funds and there are bad mutual funds. How do you pick the best mutual fund? Here are five important things to consider before purchasing them.

Objective. Are you looking for aggressive growth? Are you willing to take risks? Or do you need something safer that grows less quickly? Or, perhaps you are looking to have a steady stream of income off an investment that’s already matured. There are funds for everyone. One of the best things to do is visit the web site of Fidelity or T. Rowe Price or another company, then study and sort through all their investments until you find a mutual fund that’s right for you.

It’s easy to find mutual funds with long track records (5 to 10 years) that have returned 10% or higher. Many companies also allow you to see how the money invested 10 years ago would have grown with their company. Fidelity has a nice graph that shows the historical growth of a $10,000 investment. Of course, as the advertisements say past performance does not guarantee future returns, but you can be confident that if a fund has shown growth over a long period of time it will be a relatively safe investment. Once invested, don’t go to sleep. Continue monitoring your investment and don’t be afraid to cash out and put your money elsewhere if the investment isn’t meeting expectations.

Performance. This is the rate of return for a mutual fund. Focus on how the fund has been performing over the last 10 years. You typically want a fund with a strong (10% or higher) rate of return when trying to grow your money. When looking for steady income from your investment rather than growth, know there are mutual funds designed for income. Sifting through and studying the mutual funds on each investment company’s web site can help you familiarize yourself with how the different funds are structured.

Cost. Front-end loads are best as they allow you to pay costs up front rather than paying once you cash out. A front-end load allows your money to grow and your investment not to be bogged down by expensive management fees. And, there are no unpleasant surprises when you go to cash out.

Turnover ratio. This shows you how often the mutual fund changes investments. A turnover rate of 50% or less means the people managing the fund have confidence in where the money is being invested, and aren’t trying to “time the market” or gamble with investors’ money.

Fund manager experience. Typically, you’ll want a fund manager with at least 5 to 10 years experience. This isn’t as important if the mutual fund you are considering has a long track record.

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Money buys freedom and investments buy “free” money

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Another tip includes knowing you can’t put your money in then take it back out quickly. Most mutual funds will have costly fees for taking your money out before a certain window of time has passed – often at least 30 days. Sometimes more. Most mutual funds also have a minimum investment of $2,500 or so. Don’t invest until you are completely out of debt, and can confidently maintain the habits a debt free man. Never go in debt for a car. If you have already gone in debt for a car, pay it off as quickly as possible or sell it.

Have a comfy emergency fund built up and your finances under control or your may end up needing your money rather than being able to invest it. Go into mutual fund investing with the idea of saving at least half your income. Designing a zero based budget and simplifying your finances can help you realize this goal.

Once you have made the initial investment, you can also have a debit set up to put money into the mutual fund each month automatically. Buy more than one mutual fund. Remember the old saying: Don’t put all your eggs in one basket. It’s a good idea to have several mutual funds as this will help minimize risk further.

Another tip is to buy when the market is low if possible. Additionally, don’t let the typical ups and downs of the market scare you into taking your money out. Think long-term with your money, not short term. Sure, your investment might have lost a good portion of its value after a stock market dive, but with long-term thinking that’s the time to buy even more mutual funds rather than cashing out.

The most important aspect of Red Pill money is developing the mentality of a saver rather than a spender. Our society teaches us from a very young age the only way to measure success is with the number of material things we have and the potential of acquiring infinitely more material things. This is totally wrong. Personally, I had a lot of things including a massive apartment and two brand new cars and a lot of other junk when I was younger, but I was miserable because I was in debt up to my eyeballs. There is nothing like the feeling of being in control of your money.

This means being happy with less. Paradoxically, being happy with less will allow you to have much, much more. If I’ve said it once, I’ve said it a thousand times: It doesn’t take much for a man to live on. Buying mutual funds while living a life of minimalism is a sure sign of a man who has figured out the game of money.

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One comment

  • You should highlight expenses as their own bullet point. For example, if a fund has a 2% expense/cost, if you gain 7% in a year, you’ve only really gained ~5% because the expense wipes out the rest. Or, if you have one that costs .75%, you’re up 6.25% for the year. This is covered in the prospectus. Load typically refers to the intermediary/broker and not to the mutual fund itself.

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