You’ve decided that you should save a portion of your paycheck, hopefully 10-15% or more, and you are confident that this is the right thing to do. But now that you have saved the money, where do you put it? Do you let the money sit in a checking account earning no interest? Do you put it in a savings account… earning, basically, no interest? Do you invest it in the stock market where returns can be all over the place? Mutual funds are a thing that you have heard of, are they the holy grail for decent returns with less risk? I was in this same position when I as in my late teens. I had $12,000 that I had saved from working full time during the day, delivering furniture, while going to community college at night over the course of two years. I made a huge mistake with my money and lost half of it in 9 months. I would like to help you not make the same mistake.
First I’ll explain a little bit about what happened with my money. The year was 2008 and I had been working hard to save all that I could in preparation for transferring to a university after completing my associates degree. It was my goal to save enough while working full time during community college that I would be able to pay for as much of my living expenses as possible from savings after I transferred. I assumed that a university would be much harder than community college and wanted to not have to work once I began so that I could focus on getting the best grades that I could. All of the adults in my life at the time told me that a mutual fund was the way to go. This was the best way to get decent returns on my money without much risk because the capital is diversified across multiple individual stocks. The stock market was a great choice, they assured me, because it had been going up steadily for several years. Everyone was making money in the stock market and it would continue for a long time (warning sign). I was intimidated by the whole process but was eager to have my money working for me, so I agreed that I would meet with an advisor and put my money in a mutual fund.
The first couple of months that my money was invested, it was steadily increasing, and I was kicking myself for having let the money that I had accumulated sit in a checking account for so long, basically doing nothing. I even began to add to the amount in $1,000 increments as I was able. Then, all of a sudden, I logged into my account one day after about a week of not checking it, and to my horror, the number was down about $1,500. I panicked and called my mom. Who else do you turn to in a time like that? She assured me that this was normal and that I should leave the money alone and it would eventually rebound. This eased my mind, but I was still very concerned. Over the next several months, the account did not rebound, it got much worse. After about nine months, I decided enough was enough. I called the advisor and demanded that the mutual fund be cashed in. Since the advisor that I chose didn’t really care about my well-being, he didn’t try to deter me and help me to make a more rational decision. I ended up with about $6,500 of the original $12,000. My two biggest mistakes that I made in this situation were that I was not selective about the advisor that I chose and also that I had no idea about the inner workings of mutual funds or the stock market in general. At the time of this writing, had I left the money alone and never taken it out of the mutual fund, I would have over $20,000. The stock market did rebound and it rebounded to a huge degree, but I was in it for the short term and not looking at the bigger picture. After losing so much money, I was determined to never invest in the stock market again. Luckily, since then I have had a lot of time to learn about finance and investing, and I am able to recognize the mistakes that I made.
Any investments made into the stock market have to be focused on the long term. No one can accurately predict the daily, weekly, or monthly fluctuations of the market, but we know for sure that historically, over time, the market has increased at an average rate of 8-10% a year. Any money that you invest should be money that you will not need to touch for at least 5 years, but more likely closer to 10 or more years. For most people this means retirement savings or college savings for their children. There are other places that you can put money that you will need in the shorter term (