Stocks versus Mutual FundsA mutual fund is a diverse holding

Stocks versus Mutual Funds
A mutual fund is a diverse holding of stocks that are managed on behalf of the investors that buy into the fund. A mutual fund allows an investor to take advantage of a diversified portfolio without having to invest a large sum of money.

What is the advantage of a diversified portfolio? It offers protection against rapid market losses of any one particular stock. If a portfolio is spread across 20 stocks, if any one of those stocks quickly loses value the effect is less than if the portfolio consisted of that one stock by itself.

When investing it is always a good idea to diversify. The problem for small investors is that they often don't have the funds to buy a variety of stocks. Mutual funds allow small investors to benefit from diversification with a small amount of money.

Besides stocks, mutual funds can be made up of a variety of holdings including bonds and money market instruments. A mutual fund is actually a company and investors that buy into a fund are buying shares of that company. Shares in a mutual fund are bought directly from the fund itself or brokers acting on behalf of the fund. Shares can be redeemed by selling them back to the fund.

Some funds are managed by investment professionals who decide which securities to include in the fund. Non-managed funds are also available. They are usually based on an index such as the Dow Jones Industrial Average. The fund simply duplicates the holdings of the index it is based on so that if the Dow Jones (for example) rises by 5% the mutual fund based on that index also rises by the same amount. Non-managed funds often perform very well - sometimes better than managed funds.

There are downsides to mutual funds. There are usually fees that must be paid no matter how the fund performs, and the individual investor has no say in which securities can be included in the fund. Also, the actual value of a mutual fund share is not known with the same precision as stocks on the stock market.

Mutual funds are often a better choice for the small investor than either stocks or bonds. They offer the diversity that provides cushion against sudden stock market movements and usually provide a greater return than bonds. Of course, mutual funds can also lose value, especially in the short term, so short term investors may be better off with bonds which offer a set rate of return.

There are three main types of mutual funds: money market funds, bond funds and stock funds. Money market funds offer the lowest risk - they consist solely of high quality investments such as those issued by the US government and blue chip corporations. Money market funds have rarely lost money, but they pay a low rate of return.

Bond funds aim to produce higher yields than money market funds and therefore carry a correspondingly higher risk. All the risks that are associated with bonds - company bankruptcy, falling interest rates - also apply to bond funds.

Stock funds usually have the greatest potential for profitable investment but also carry the greatest risk. The risk is more for short-term holders of mutual funds - stocks have traditionally outperformed other investment instruments in the long run.

There are different types of stock funds including 'growth funds' that attempt to maximize capital gain and 'income funds' that concentrate on stocks that pay regular dividends.

Mutual funds are an ideal investment for those with limited funds or investment experience. Choosing the right fund is a decision on how much risk you are willing to take against your expected return on your investment.

Stop Paying the Minimum.Credit cards are there to put you

Stop Paying the Minimum.
Credit cards are there to put you in debt and keep you in debt. When they do it, they have one tool at their disposal that is more effective than all the others. It's called the minimum payment.

What's a Minimum Payment?

Your minimum payment is the absolute minimum that you must pay off each month to avoid defaulting on the debt. If you don't pay your minimum, they'll come after you - but don't make the mistake of thinking it's just fine to only ever pay that much.

Why are Minimums Bad?

They never used to be. Minimum payments used to be set at relatively high percentages, anywhere from 5% to 10%. This meant that you paid more, but your debt would get paid back faster.

Credit card lenders realised, though, that they could set the minimum payments lower, and collect a smaller amount of money each month for a much longer period of time. This would let them tell people that debts on their cards were 'affordable', while they raked in the cash over the long term, thanks to the power of compound interest.

Here's an Example.

Let's say you owed $1000 at an interest rate of 12.7% per year (1% per month). Your minimum payment is 5% per month. Remember that your payment goes towards the interest first, and then the debt. In this example, $10 out of the $50 you paid would disappear as interest - but $40 would still go towards paying off the debt, meaning that your debt the next month would be $960.

What happens if you change the minimum payment to only 2%? Well, the difference is enormous. Sure, you're only paying an 'affordable' $20 - but $10 of it is still going on interest. That means that your $20 has only paid back $10 towards the debt, and you still owe $990!

There are so many people who just look at the interest rates they're being charged, and don't understand the terrible difference it can make if you only ever pay the minimum payment. In our example (which is relatively typical), 50% of the payment was going on interest - meaning that paying the minimum gets you an effective 50% interest rate, even though your APR was only 12.7%. For higher interest rates, it only gets worse: there are cards out there where only making the minimum payments will actually cause you to owe more each month, not less!

So What Should You Do?

The answers aren't fun, but they are true. Firstly, look for a card with a high minimum payment - this is a good way to discipline yourself into paying off the debt faster.

Secondly, always pay more than the minimum if you can afford to. I know it feels like money for nothing, but isn't it better to pay it now and get it over with, instead of paying it for the rest of your life?