Managing Mutual Funds In A Tough Economy

In Tell Me More's weekly "Money Coach" segment, host Michel Martin and personal finance contributor Alvin Hall take a fresh look at investing in mutual funds in a tough economy. Hall is the author of the book, "Getting Started in Mutual Funds" and offers advice for first time investors, on making smart decisions.

MICHEL MARTIN, host:

I'm Michel Martin, and this is TELL ME MORE, from NPR News.

Coming up, we'll hear about an up and coming standup comedian whose background makes her stand out. Her name is Aparna Nancherla and we'll talk with her in just a few minutes.

But, first, we have our weekly look at issues of personal finance. Signs of the beginnings of an economic recovery are out there, but it may be a while before the average person's confidence in the markets improves. With huge losses to retirement savings fresh in our memories, many are understandably reluctant to get back in the market. But our money coach argues that there is one type of investment worth considering in nearly any economy: mutual funds.

He's so big on mutual funds, in fact, that he wrote a book called "Getting Started in Mutual Funds." The second edition of that book is out now. And he's with us to tell us more about it. He's our regular contributor on matters of personal finance and the economy, Alvin Hall. And he's with us from New York. Welcome back, Alvin, thanks for joining us.

ALVIN HALL: Glad to be here.

MARTIN: So I just want to clarify up front for people who are interested. You do not derive any income from mutual funds.

HALL: No.

MARTIN: You are not advising any particular group. So there's, you have no stake in this argument. This is purely a matter of information, just to give full disclosures.

HALL: Exactly. Exactly.

MARTIN: OK.

HALL: And the book really came out of the fact that when I started on Wall Street I didn't know anything about investing. And I remember so clearly trying to find good information. In fact, Michel, when I made my first investment on Wall Street, I lost all the money that I had in the shares. So with that I became aware of mutual funds.

And over time, when I would be talking about them or teaching about them, people would ask questions. So this book really comes out of almost a quarter of the century now of teaching on Wall Street and learning about what people want to know about mutual funds. So I decided this book would encapsulate all that information.

MARTIN: So, what is a mutual fund? Keep it super basic.

HALL: A mutual fund is basically a portfolio of securities. It can be as small as 10 to 20 securities, or as big as 300 to 400 securities. There is a portfolio manager that manages the assets. He buys and sells shares, bonds and other types of investments in and out of the portfolio.

Typically the portfolio manager works for a big company like a Fidelity or a Charles Schwab or a T. Rowe Price that actually sets up the portfolio that's called a mutual fund.

MARTIN: And why are they popular?

HALL: They're popular because they come with three advantages. One, they give you access to professional management. Typically the people who are managing the portfolio and today it's not an individual so much as it is a team. They have degrees. They studied various financial and economic models to try to maximize the value of the portfolio.

The second advantage is diversification. Most of the large mutual funds are diversified over the different types of assets. So you have large cap, small cap stocks, you have growth stocks, you have income producing stocks within the portfolio. However, having said that, some of them focus on an asset class. For example, some will only invest in certain types of bonds.

And the third advantage is low cost, typically compared with the commissions that most people would pay if they bought stocks. Individually mutual funds can be lower.

MARTIN: Just to clarify for people, if you participate in a 401K plan, a 403B plan, a 529 college savings plan, an IRA, or any of those kinds of things, then chances are, you're probably investing in mutual funds.

HALL: Chances are pretty strong that you're investing in mutual funds because the government only allows mutual funds to be the type of investments in some of those types of plans.

MARTIN: If you're just joining us, you're listening to TELL ME MORE from NPR News. I'm Michel Martin. We're speaking with our regular contributor on matters of personal finance and the economy, Alvin Hall. His latest offering is "Getting Started in Mutual Funds." The second edition is just out now, and he's with us from New York.

And, you know, Alvin, one of the reasons we decided to talk to you is that you kind of go right to what a lot of people are probably thinking as they're having this conversation with us. You say, I'm writing this second edition of "Getting Started in Mutual Funds" during a worldwide recession, one of the worst bear markets in recent U.S. history.

Many of the funds in which we - you and I - invested the money we earned or inherited, set aside for our retirement, our children's education, are down in value 25, 35, even 50 percent. You've just admit it, trillions of dollars have disappeared from our personal net worth, you know, as a group, obviously.

HALL: Exactly.

MARTIN: So the question a lot of people would have is, why should I, you know, get burned again?

HALL: Well, the thing that I learned from my own experience is that it's good to take a break. But know that the stock market historically does recover. I was just looking at some newspapers and some magazines recently, and everybody was saying that now is the time for people to drop their fears of stock and get back in. That's easier said than done.

What I think people should take away from the recent economic crisis is that even investing in a mutual fund, you should not be on autopilot. You should definitely monitor it on a regular basis. And when you're uncomfortable with what the stock market is doing, maybe that's the time to switch to cash or stop putting money into mutual funds, but putting them into money market mutual funds.

MARTIN: How do you go about picking a fund?

HALL: You start out by looking at the menu of mutual funds that are being offered to you. And I tell everybody the first step has to be an awareness of your own risk. How much of this money are you willing to watch fluctuate by 20 percent? How much are you willing to fluctuate by 50 percent? Once you've done that, then you can start by looking at the mutual funds on offer to you and doing your research.

There are three companies that provide third-party objective research about mutual funds. They are: Value Line, Morningstar and Standard and Poor's. They each have a rating system, and you should look at those rating systems.

MARTIN: How do you know, though, that these evaluations are truly objective?

HALL: Recently, some of the laws regarding the disclosure of information about mutual funds changed. So it has to be done now, in plain English. Many of the people who evaluate the funds try to do so by distancing themselves from the fund manager. They will look at the fund manager's experience on paper. They may talk to them occasionally, but they're not going to ask them what they are buying and selling. They look at the actual portfolio and what decisions they've made in a cold-blooded, objective manner. So therefore, they have some distance to the spin, if you will, that the portfolio manager may be putting on this.

MARTIN: So the bottom line though, Alvin, is that should people be investing any money in mutual funds if they can't afford to lose it?

HALL: If you can't afford to lose the money, then mutual funds are not for you. Full stop.

MARTIN: Alvin Hall is TELL ME MORE's regular contributor on matters of personal finance and the economy. His book "Getting Started in Mutual Funds" is just out in its second edition, and he joins us from our bureau in New York.

Alvin, thank you so much for joining us once again.

HALL: Glad to be here. And happy investing.

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