You don’t make investing mistakes because you’re smart, right? Um, ok. Whether you’re a veteran with handling savings and investment decisions or new to the investing world, it pays (literally) to learn, and avoid, investing mistakes that so many others have made before you. So, before you buy your first shares of the next Amazon or Google, check out the nine most common mistakes that investors make:

Jumping on an overhyped stock

Hey, big shot! You got in on that Facebook IPO, didn’t you? Wow, you’re a player! Wait – you really did buy shares of Facebook on the first day they became available? Sorry to hear that. If we learned anything at all from the recent Facebook IPO debacle, it’s that the small retail investor should steer clear of any IPO.

In fact, the more media hype that there is around an IPO, the more wary any potential investor should be. IPOs are “initial public offerings” that mark a private company’s debut on a stock exchange, when the company becomes publicly held. For well-known companies, an IPO can garner significant attention (translation: “hype”) from the media. This is bad for you, the small investor, who probably thinks very little about the stock market at any other time. Let the “big fish” play in the IPO sandbox.

If you’re interested in an individual company stock, invest in it for the long term – and wait until the hype (and the share price fluctuation) dies down. By the way, in case you didn’t know: Facebook shares dropped over 25% in their first two weeks of trading. Be very glad you didn’t get in on this particular IPO, hot shot.

Avoiding diversification

OK, so you own some shares in the Acme MegaFund Value mutual fund, and you also own shares in the HugeCorp Growth mutual fund. You think you’re invested in lots of different companies, don’t you? Think again. Check out the companies that your mutual funds invest in, and you might find that there’s some “overlap”: two very different funds with significant chunks of their portfolios in identical companies.

So, read your mutual fund prospectus. Sure, it’s pretty boring (do so when you’re getting ready for bed, and are having trouble falling asleep). Then you’ll know what companies are being purchased by your funds.

By the way, the only time you should have to read a fund prospectus (yawn) is before you invest in the fund for the first time. After that, you might glance at it once every two years or so to make sure your mutual funds are buying companies you like, and avoiding companies that you don’t care for.

Avoiding international opportunities

It seems that half the countries on the planet are involved in guerrilla conflict, drug smuggling, nuclear weapons testing, and counterfeiting Disney DVDs. Still, even with this cynical view, that means that the other half of the countries around the globe are involved in legitimate trade and possibly on the verge of becoming homes to the next Google or British Petroleum.

Avoid investing in countries outside your own borders at your peril. Most economic growth taking place right now is within countries that may have offered risky investment opportunities not long ago. But times have changed, and just because opium poppies are a major cash crop in Afghanistan doesn’t mean that the next superpowered microchip can’t be developed in Brazil or India.

Too much of your portfolio in one company

Do you have most of your retirement portfolio invested in the company that employs you? You dummy! Sell, sell! Well, ok – at least slowly spread out your investment around a few other companies. What happens if you get laid off? Not only will your biggest source of income disappear, but the company you once worked for might be in trouble. Do you want to be invested in that company? Of course not.

Thinking you can outperm the market when your a newbie

Yeah, sure. You and every other bloke who opens up an online brokerage account and reads a couple of books about “how to get rich in the stock market”. Trust me, odds are that the folks who write books on this type of stuff are getting rich off of their book sales, not their investing prowess.

Highly paid stock traders with skilled research staffs are going to battle against you, the average small investor. Do you think that even they outperform markets on a regular basis?

It’s possible, but it’s not easy. Usually only the most experienced traders can acheive this consistantly. It’s unlikely that u’d be able to acheive this in your first few months of trading.

Avoiding index funds

Why bother investing in “actively managed” funds at all? Good question. Not only do many actively managed funds fail to outperform the markets (see above), they also tend to charge higher fees. And fees, by the way, can really mess up your portfolio growth over the long run.

It pays to find funds with very low fees, and index funds tend to charge the lowest fees of all mutual funds. Index funds are “set it and forget it” funds, which means that they don’t need an overpaid fund manager to maintain them. If you want to be invested in the markets without thinking too much about which mutual funds you should invest in, then simply invest in index funds. Then go take a long nap or grab a beer.

Keeping too much of your portfolio in illiquid investments

What happens when your rusty old clunker finally requires that transmission replacement that you’ve been putting off for the last two years? Homeowner’s insurance won’t pay for the repairs, and you probably won’t be able to cash out of your mutual fund or stock investments in a hurry. So, always keep some cash on hand just for emergencies. Online banks are good for storing money that you might need to transfer to a checking account quickly. It’s normal for a transfer to be completed in two or three business days.

Believing that “the sky is falling!”

There are always a few “gurus” running around yelling: “buy gold and silver because the major world currencies are going to be devalued and the world will end next week!!!” Please. For thousands of years, there have been people running around yelling that the “end is near”.

(Lately, the Mayan Indians are guilty of this, and heck – they aren’t even around any more. Now, that’s influence!) The world won’t end, the sky is still blue (well – usually), and gold and silver probably shouldn’t take up more than 5% of your portfolio.

You’re going to miss out if you avoid buying stocks or mutual funds that invest in growing companies, because you listen to “end is near” precious metals hucksters. The wealthiest folks in the world didn’t get that way by building bomb shelters and stacking gold bars in them.

Failing to consider your own investing personality

Do you like to go bungee jumping? Do you enjoy hanging out with shadowy criminal types who engage in questionable businesses? Or is your idea of a good time a night in front of the T.V. watching “The Bachelorette” reruns?

Take your own personality into account when you choose your investments. Some individuals can handle wild stock price swings better than others, while others like their investments, well – boring. Ideally, you might consider small investments in exciting and “sexy” companies, while keeping big percentages of your portfolio focused on sleep-inducing businesses. And, reconsider your hobbies if “Bachelorette” reruns really are your favorite pastime. You should get out more.

Face it, you’re reading this post, so you’ve learned something, haven’t you? Oh, yes you have, admit it! Click on your RSS feed and add this blog to your list of subscribed blogs. You’ll continue to learn (and slowly build wealth) by becoming a subscriber. You’re welcome.

If you’re into investing and want to know more about making money in the markets, you probably have asked yourself at one point this question: “What are mutual funds?” You’re not alone, either; mutual funds easily constitute one of the most popular asset classes for investment in the world.

Here, I will tell you what a mutual fund does, how it works, and talk about the advantages of mutual funds and how they compare to other asset classes.

What is a Mutual Fund?

A mutual fund is a collective investment scheme that takes investment funds from thousands of individual investors and pools it together into a pot of money. This pot is then used by a professional fund manager who uses it to buy and sell shares of stocks – or bonds, or commodities, or commercial notes, or other securities.

Put another way, let’s say you want to invest in real estate. You can pick a single home in a city and purchase it. Or, you could pool your money with your friends and give it to a professional real estate investor, who acts as your manager. The manager then takes that much larger pool of money and buys a residential home or two, plus a couple of apartment buildings, a townhouse, a luxury condo, and a couple of office buildings – all located across the city.

You have just created a mutual fund for real estate. In essence, what you’re doing is multiplying your purchasing power and diversifying your holdings at the same time – all while letting a paid professional do the dirty work of investment for you.

How Are Mutual Funds Valued?

The main way a mutual fund is valued is based off its net asset value(NAV), which is calculated by taking the number of shares of the fund that are out in the market and dividing them into the total value of the fund.

Before we go further, though, it’s important to understand the difference between the two different types of funds: open-end funds and closed-end funds.

An open-end fund is a mutual fund that issues shares based on demand. As long as people want shares of the fund, they will be issued – and as long as people want to sell their shares, the funds will buy them back. Most mutual funds are open-end funds.

A closed-end fund is one in which there is a limited number of shares. These are actually very much like stocks, in that they are traded on stock exchanges, except that these are actively managed by professional advisors.

Since open-end funds are what we think of when we think of “mutual fund”, and are the most common type of mutual funds, we’ll focus on that type. The value of an open-end mutual fund is calculated by dividing the value of the assets held by the mutual fund by the number of shares outstanding (i.e. NAV). NAV changes based on the underlying value of the assets in the fund’s portfolio.

NAV is the price at which you can buy shares of a fund. You profit from a mutual fund either by the difference between your purchase price and the sale price of the shares you buy and sell, respectively, or by dividends generated by the fund.

What Types of Funds Are There?

Within open-end funds, there are several types of mutual funds, including:

• Stock funds: These are the most common types and feature bundles of stocks either in one industry or sector or spread across several.
• Corporate bond funds: These are funds that invest in corporate bonds, which have lower returns on average than stocks but aren’t as risky.
• Government bond funds: These funds invest in bonds and notes issued by governments, including the U.S. Treasury. These tend to be the safest funds in the world.
• Junk bond funds: Also known as “high-yield bond funds”, junk bond funds invest in bonds that have very high yields, but are very risky – and are more vulnerable to downswings in the economy than other bonds.
• Municipal bond funds: These funds invest in municipal bonds, which are bonds issued by cities and local/state governments. Income from these funds are tax-free, which means you can generate higher returns than other types of corporate or government bonds.

Within stock funds, there are several types:

• Value funds: These funds invest in stocks that are determined to be undervalued, i.e. currently priced below what they normally should be as judged by the underlying financial strength of the companies represented. Commonly, these are either companies that have had their stock prices beaten down by the market but otherwise are sound, large, and here to stay, or stocks with low price-to-earnings ratios or price-to-book ratios.
• Growth funds: These funds invest in stocks that generate higher-than-average earnings and are growing rapidly. You gain more return than with value funds at times, but you also are exposed to more risk.
• Income funds: These funds invest in stocks that generate income through dividend. If you want steady, fairly-predictable income, these are your best bets. You can have income produced while also enjoying appreciation in your assets.

You can also find blend funds which combine two or more types into one tradable asset.

How Much Does It Cost to Trade Mutual Funds?

Investing in mutual funds does cost money. With stocks, you pay commissions or flat fees. With mutual funds, you also pay management fees and expenses. Trading stocks with discount online brokerages is generally viewed as less expensive than investing in mutual funds.

One way to avoid this is to find no load mutual funds, which are funds that have no transaction costs. Let’s say you have $1,000 to spend. You choose a load mutual fundthat charges a commission of 5%. You will pay $50 either on the front end or out of your profits for this fund, meaning only $950 is actually used (if it’s a front-end fee).

A no load fund would use the entire $1,000 amount. These are typically used because the investment company that owns the mutual fund issues shares directly, instead of going through intermediaries. If you want to avoid paying a broker or advisor who selects mutual funds for you to choose from, no load mutual funds are the way to go.

Generally speaking, it is better to find mutual funds with the lowest fees and expenses possible. Statistical analysis has shown that load mutual funds do not outperform no load mutual funds. In fact, one study has indicated that no load mutual funds actually outperformed load mutual funds from 2000 to 2002.

Why Invest in Mutual Funds?

The main reason most people turn to mutual funds is diversification. To get the same kind of diversification (i.e. risk mitigation) from a single mutual fund, you would typically pay more to get a basket of individual stocks that accomplishes the same thing. Plus, you’d have to keep up with dozens of individual stocks instead of one, convenient investment vehicle – the mutual fund.

Mutual funds are also great if you have no interest in picking stocks or are not good at it – and many traders aren’t. Plus, if you don’t have the time to play the stock market, a mutual fund will more than adequately suffice. Mutual funds, furthermore, are preferable for beginners who want to get into investing but probably shouldn’t jump right into picking stocks and letting the dice fly.

Finally, mutual funds are good for those who want professionals to pick and manage the assets.

Of course, there are three drawbacks to a mutual fund. The first is cost. Mutual funds are more expensive than individual stocks because they incorporate fees and expenses that are more than your typical stock trade commission.

The second drawback is that you lose control over what assets go into your mutual fund, whereas with a stock portfolio you and you alone have control.

Finally, the third drawback is how mutual funds are priced. The price of a stock changes in real time throughout the day. The price of a mutual fund isn’t assessed until the end of the trading day, with the fund’s closing price. This takes away the real-time trading aspect of stocks. One way to avoid this is to consider trading exchange-traded funds (ETFs), which are mutual funds that trade like stocks.

Mutual funds can be powerful assets to have in your portfolio. Ask your financial advisor for more information.

Whilst it is a given that investing as early as possible for longer term goals is the best way to build funds for the future, it is often difficult for younger people to do so. They face many challenges that older people do not. Understanding these challenges will help to identify routes to negate them, or at least cut them back as far as possible to enable earlier investment.

Many people in their 20’s are fresh out of college and starting their first job. Increasing amounts of debt are carried by graduates, and this debt has to be supported and serviced by what could be a low first wage.

Whilst the hope will be that the gaining of a degree, coupled with a strong work ethic will lead to a higher than average salary throughout one’s career, there are few companies willing to pay top dollar to the new employee. For this reason, money is often tight and disposable income is spent on pleasure rather than saving for retirement.

Another problem that younger investors face is the lack of experience with money and investing. Financial control is not a subject covered with great conviction in general education. It can take many years, mistakes, and ‘self-education’ to learn control over budgets. The temptation of youth is a financial as well as a moral concern! Learning how to invest, and avoid too-good-to-miss investment scams, is also on the agenda at this time.

Finally, many in their 20’s start relationships, get married, and have children. This is another pull on finances, and the needs of today often outweigh concerns for the future.

The opportunities

It’s not all bad news for though. One of the main advantages of being so young is that of time. An investor in his 20’s has time on his side to learn about investments and different assets. Being technology adept, younger people are more able to focus time on studying, research, and can quickly learn how to use investing and trading tools.

Younger people can also afford to take higher risks with the potential of higher rewards: any losses can be more easily made back the longer there is to do so.

Because the investment time frame is so long, a 20-something investor will need to commit less money now to enjoy a larger pot at the time he needs it. $10,000 invested by a 20 year old will have grown to $70,000 by age 60 if it accrues at a rate of 5% per annum. The same sum invested at age 40 would only have grown to $26,000 at the same rate of growth.

The difference is even more dramatic when it comes to regular investing. For a 20 year old able to invest $1200 each year over a period of 40 years will yield a final fund of $150,000. A 40 year old investing the same amount for 20 years will find himself with less than $40,000. (Again, based on a rate of return of 5 %.)

The solution

Learning to budget and control costs when in the 20’s is the key to successful investing for the future. Whilst it is a dream of many to invest a lump sum, good returns can be achieved by investing little and often, allowing the investor to benefit from dollar cost averaging in his investments. A further benefit of investing this way is that saving becomes part of everyday budgeting: smaller amounts are forgotten as just another expense.

Also taking the time to study markets and investment opportunities will not only make for better investment decisions now, but also in the future.

How to invest

It is important that savings are made toward both longer term (retirement) goals and also for accessible cash in emergencies.

Whilst emergency cash can be deposited and built up in savings accounts, a brokerage account will give the potentially higher returns of stock market investing whilst at the same time leaving funds accessible pre-retirement.

Retirement accounts, such as 401k’s and IRA’s, have tax advantages not available to brokerage accounts. For retirement investment planning these tax benefits will help investments grow more quickly.

Whilst it is likely that portfolios at a younger age will be targeted toward capital growth, young investors should not discount the power of investing in dividend paying stocks and then reinvesting those dividends. Compounded returns can mount up over a period of time.

What to invest in

With fewer responsibilities and time on his side, the 20-something investor can afford to invest in higher risk/ reward stocks. Speculative or high growth companies, perhaps new, smaller companies that are geared towards today’s technological economy can provide great returns (but the investor shouldn’t forget the risks).

Perhaps first, though, with little disposable income available and the high likelihood of a low level of investment knowledge, investment decisions should be left to experts. For this reason, many starting out investors will put money into diversified mutual funds, letting fund managers select value stocks in which to invest. Different funds cater for different risk tolerances, and higher risk/ reward funds are readily available from most providers.

Some investors will broaden their investments through time as financial ability grows; others will find they are happy to remain invested in mutual funds.

To Finish Up

Planning for your financial future has never been more important or relevant. Government support for retirees is likely to reduce over the coming decades, and it will be those individuals who begin the retirement investment process early who will be the winners.

It shouldn’t be forgotten that there are other calls on money throughout your life, and wise investment now will mean less need to borrow in the future at unknown rates of interest. A good investment plan will enable spare cash to grow to fund future college fees for your children, foreign holidays for you, and even build the deposit required for your first home.

Learning to budget and investing early is the key to future financial freedom. While you are young and able to take a more aggressive investment stance, the opportunity for capital growth is at its greatest.