Mutual Funds

I actually started with mutual funds during the summer of 1988 when I was living in Boston and went to work at a tiny little mutual fund company called Fidelity Investments. When I first started there, I was hired by a temporary services agency and they sent me to Fidelity’s newly opened offices at the World Trade Center in Boston. Before that, Fidelity had a small office on one or two floors in one of the towers over off of State street in the financial district. I was hired strictly as “data entry” and spent my days there entering new account information from mutual fund buyers. Converting their paper accounts documents and records into digital accounts. Back then the temporary agencies actually paid you more to work without being permanently hired, and for three months, I helped build Fidelity Investments into what it is today, a global financial powerhouse. We used Ashton-Tate’s dBase III for that.

The World Trade Center back then was also a brand new office building that had been built directly on the wharf by Fidelity right next to Fisherman’s Market on the next Pier over in the Boston seaport where all the open water fishing trawlers would come with their sea catches, and you could buy seafood by the crate, and they would filet it for you, and pack it on ice right on the docks. I used to get fresh baked bread and the best fresh scallops for lunch from the No Name Restaurant right on the fish pier there. Now all the lobster guys worked out of the small boat docks in South Boston, and were Southies. They worked hard, they drank hard, and they played hard, and made a good living as well. I’m getting sidetracked here though… back to Mutual Funds.

Fidelity had opened their offices at the Pier in 1986, was hit hard by the crash of 1987, and then bounced back, and was hiring like mad in the summer of 1988 as their market grew almost exponentially because stocks and traditional broker houses had been hit much harder by the 1987 stock market crash than Fidelity had. Fidelity had actually weathered the downturn much better than their competitors and was scrambling to gain market share. I think they had twenty, maybe twenty-five brokers back then, and they were all at the World Trade center on the pier in Boston where I was also working for them, because Fidelity had moved their Headquarters there. It was a great job, but I got hired permanently by Teradyne, an electronics firm in Boston that built test equipment for electronics manufacturers in the early autumn, and ended up working there for three years before moving to Southern California and working for Ford Aerospace/Kay in 1991.

Mutual funds are collective pools of money that have been invested by individuals. Money managers take these funds and invest them in different securities, in a way that focuses on either long-term growth or high pay-offs while minimizing risk as much as possible. Because these funds are a collective, each shareholder will benefit or lose equally. However, those who select a mutual fund investment over individual stocks or bonds typically enjoy less exposure to risk, as they are diversified between different types of securities.

When you invest in a mutual fund, you can typically buy shares through a mutual fund company, brokerage, or bank—many of which are available online. Many individuals will use their 401(k) provided through their workplace to invest in mutual funds, as a way to save up for retirement.

Essentially, mutual funds can increase their value and make you money from three sources: dividend payments, capital gains, and net asset value (NAV).

Dividend Payments: A mutual fund receives interest or dividends on the securities in its portfolio and distributes a portion of that income to the investor. If an investor decides to purchase shares in a mutual fund, they can receive distributions directly or choose to have them reinvested in the fund.
Capital Gains: Investors have the option of earning capital gains by selling your shares for more than you paid for them. A capital gain is when a fund sells a security that has an increase in price. A capital loss is when a fund sells a security that has decreased in price. Investors receive distributions from most funds with any net capital gains annually.
Net Asset Value: When the value of a mutual fund increases, the price of the purchasable shares also increases. This is known as net asset value (NAV) per share. This works very similar to how the value of a stock increases. While you do not receive distributions, an investor would make money when they decide to sell as their investment has gained value.

Traditional stocks are usually purchased through a brokerage, but mutual funds award investors a few more options. While many brokerages do offer the ability to buy into mutual funds, investors may also choose to invest in them through 401(k)s, pensions, and individual retirement accounts (ROTH or traditional). There are always exceptions, but most employee-sponsored retirement accounts will grant access to mutual funds. If all else fails, investors may go directly to the source. Nothing is stopping interested investors from going to the company that created the actual fund. Vanguard, Fidelity, or American Funds all provide access to their mutual funds, though the options may be limited.

Investing in mutual funds has proven—time and time again—to be a worthwhile endeavor. At the very least, professional money managers tend to have a slightly better grasp of the market than novice investors, and spreading out your investments into a pool of stocks, instead of buying individual stocks brings the stability of a diverse portfolio, to limit the reach of economic reverses and downturns on the value of the mutual fund. .

I continue to maintain a small investment in Fidelity Investments, even today and write a semi-annual investment report on the most profitable mutual funds to invest in. You can sign up here to subscribe to that report.