Where to invest

So how are you supposed to know where to invest your money if you have to allocate it among different asset classes and diversify it with each asset class? That’s a good question. It can be difficult to pick one good investment, let alone five or ten.

Fortunately there are certain investment products, such as mutual funds, that make asset allocation and diversification easier.

Mutual funds are a popular way to invest. The beauty of mutual funds is that they are already diversified for you, so you don’t have to figure how to diversify on your own. In fact, as a young investor, you might find it easiest to invest in mutual funds rather than choose individual stocks and bonds.

In a mutual fund, a professional investor, called a money manager, pools all the investors’ money and invests by buying many stocks or bonds depending on whether it’s a stock fund or a bond fund. This way, even if one stock turns out to be a total dud, chances are some other investments in the fund turn out great — and the mutual fund can meet its goal of providing a positive investment return. The other type of fund you might consider is a balanced fund. It buys both stock and bonds, so it provides both asset allocation and diversification in a single package.

As you no doubt know by now, nothing in life is free. So when you invest in a mutual fund, you pay certain fees to the mutual fund company, which it uses to manage the fund, make the investments, and provide investor services. These fees are calculated together and called an expense ratio, which gives you an easy way to compare the cost of investing in different funds.