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Mutual funds for dummies - Tyson E

Tyson E. Mutual funds for dummies - Wiley publishing , 1998. - 425 p.
ISBN 0-7645-5112-4
Download (direct link): mutualfundsfordummies1998.pdf
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Well, Chris reasoned, if limited partnerships were good enough for Louis’s company, an obviously successful brokerage firm, and for Louis and his family, then limited partnerships were good enough for her. She put three-quarters of her inheritance money into a couple of them.
More than a decade later, here’s the news on Chris’s limited partnerships:
Total invested = $150,000. Current value = $8,000.
In addition to high sales commissions and high ongoing management fees, the LPs make poor investments, as I explain later in this chapter. Oh, and Chris must pay her accountant to fill out those nasty special income tax return schedules for LPs every year.
Luckily, Chris reserved $50,000 of the inheritance for a home down payment. By 1987, however, real estate prices in northern California seemed to be heading into the stratosphere, so when Louis called again with stock recommendations, Chris was receptive to his advice (it wasn’t yet clear how bad the LPs would prove to be). If she could just make her money grow, Chris thought, she could afford to buy a good home that she’d be really happy with.
She bought half a dozen stocks — which promptly nose-dived 40 percent when the stock market crashed that October. Monday had never been Chris’s favorite day, so when she heard on the news that the market had dropped more than 500 points (a 22+ percent plunge) on Monday, October 19, for her, that day was indeed Black Monday.
Chapter 1: Investments Primer
She had a hard time getting through to Louis, whose secretary said, “He’s very busy today helping clients make changes with their investments.”
When she finally got through to him, Louis helped Chris make changes to her investments, too. “A money market fund will provide a safe haven from the turbulent financial markets,” he reasoned.
Chris didn’t want to jeopardize the future home purchase, so she took Louis’s advice to sell her stocks and put the proceeds into a money market fund. Her $50,000 was now worth about $28,000. That’s when she finally knocked on my door, both her portfolio and her ego quite deflated.
Although Chris was being hard on herself when she said that she had made every investing mistake there is to make — actually, there are many more — she had made other financial mistakes during her years of investing horrors that she wasn’t even aware of:
She had missed out on the opportunity to contribute to tax-deductible investment accounts through her employers.
u* She had racked up more than $10,000 in high-interest consumer debt, mostly on credit cards, further reducing the size of her assets.
And, at the risk of having you think I enjoy finding fault, I must tell you that Chris had neither long-term disability insurance nor life insurance when she called me — even though she had started a family following her marriage in 1992.
Chris made her investing mistakes for one simple reason: She didn’t understand investments. She didn’t know what her investing options were and why particular options were inferior or superior to others.
By reading this book, you can prevent yourself from making big investment mistakes. And you can take advantage of an excellent investment vehicle: mutual funds — the best of which offer you instant diversification and low-cost access to outstanding money managers. And you do this in the context of your overall financial plans and goals.
Now, I’m not going to try to fool you by saying that you can’t make mistakes with mutual funds, because you can. But, because the best mutual funds are superior in many respects to many other investments, they help you minimize your risk while maximizing your chances of success. People from many walks of life use funds because of this. This chapter gives you an investment overview so you can see how mutual funds fit into the overall investment picture.
Part I: The Why and How of Mutual Funds_________________________________________
Mutual Funds: An Investment
At their most basic, mutual funds are an investment.
“Tell me something I don’t know; I’m not that dumb,” you say.
I know that, but please bear with me. I don’t want to make the mistake that I see so many investment writers (and financial advisors) make: starting with the more advanced stuff on the assumption that you know the basics. So often I hear from people reading about mutual funds and complaining that a writer starts throwing around terms such as “small cap value stock fund” and “asset allocation” without explaining them, and before you know it, you’re lost in the weeds and frustrated. You have every right to be.
If you already understand what stocks and bonds are, their risks and potential returns, terrific. You can skip this chapter. Most people, however, don’t really understand the basics of investments, and that’s one of the major reasons that people make investment mistakes in the first place. If you understand the specific types of securities that funds can invest in, you’ve mastered one of the important building blocks to understanding mutual funds.
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