Not a Fund Investor Yet? Five Mental Hurdles to Overcome

You’ve read good things about mutual funds, but for one reason or another you fail to trust your hard earned dollars in them. Perhaps you’re not right in the head! Let me play investment psychologist and help you get over five common mental hurdles.

Hurdle #1: I don’t have enough to invest in a mutual fund.

You can invest in a mutual fund for as little as $100. Mutual funds are the ideal place to invest small amounts of money because you can buy a mutual fund without trading costs. For example, if you put $100 into a stock each month for a year, you will end up paying at least $160 in commissions at a discount broker, so out of $1,200 invested, only $1,040 goes to work for you (an automatic loss of 13%). But when you invest $100 a month directly with a fund company - all $1,200 goes to work for you!

The trick with investing is to invest early and invest often – even if it is a small amount of money. I worked with a guy who used to work at an investment firm whose largest client was the estate of their buildings janitor. For more information on how this could possibly be, read “the power of compounding interest.”

Hurdle #2: I don’t want to risk investing in non-guaranteed or non-insured investments.

Despite the seemingly safe bank investments or insurance products, mutual funds are safer than you think. Mutual fund prices are driven by the price changes of the securities it holds (the fund is only as risky as you the type you choose). Banks and Insurance companies can go bankrupt, but by definition, mutual fund companies cannot.

Once you understand inflation, average returns of different types of investments and compounding interest, you may realize you are taking a bigger risk by tying your money up with low producing products (like savings accounts).

Hurdle #3: I can do better picking stocks on my own.

I’m always amazed at people who think they are better at picking stocks then a dedicated team of seasoned professionals. Study after study shows that investors are horrible at picking stocks. Then there are index funds, which are notorious for beating even the best professional stock pickers over time. It’s true that you can roll the dice and potentially hit a home run (or lose all your money), but anyone who has been to Vegas and seen the sheer wealth of the casinos realizes that law of numbers wins in the end.

Hurdle #4: I know more about my company then the mutual funds offered in our retirement plan, so I’m going to invest in what I know.

Investing in company stock is one of biggest mistakes in retirement plan investing. The beauty of mutual funds is that you don’t need to be an expert on the hundreds or thousands of stocks that it owns. Diversification helps keep your returns up and risk down. Your job is already tied to your company – if the company crashes, don’t let your retirement plans crash as well. For more information, read “The Dangers of Investing in Company Stock.”

Hurdle #5: I don’t understand how mutual funds work, so I shouldn’t invest in them.

Investing in mutual funds is really simple. It can be as simple as filling out an application online and mailing it in with a check. If you don’t want to learn about them , you could simply invest in an S&P 500 fund (which represents the 500 biggest companies in the U.S. stock market). However, knowledge is power and if you do desire to understand mutual funds and make smart investing decisions, I invite you to sign up for my free mutual funds 101 ten-day email course.