“Splain it to me Lucy…”

“If you can’t explain it simply, you don’t understand it well enough.”

~Albert Einstein

Question: Would you explain what mutual funds are? I’m uncomfortable asking anyone because I feel like I should know this by now.

Answer: I’ll start with the same gentle statement I give our grandkids. How could you know something unless it has been explained to you in a way you can easily grasp and understand as a new concept. My husband often reminds me, financial professionals can be guilty of using jargon unique to the industry making this the place to ask your questions. 

One way to explain mutual funds is to visualize a trip to the grocery store thinking of your cart as the container for a mutual fund. The aisles represent various investment sectors with individual items as specific mutual fund holdings. Your selection process for food or investments will likely depend on your goals and objectives. 

Last weekend I made pot roast and oatmeal cookies. They each required specific ingredients. A balanced mutual fund is like a pot roast dinner consisting of vegetables and protein, while the oatmeal cookies are more like specialized or thematic funds. Both provide nutritional value yet play different roles in meeting our overall needs. 

The second mutual fund depiction involves windows comparing a single large bay window with a multi-paned window. The individual panes represent a variety of individual stocks and bonds designed to provide diversification which may minimize risk over time. In contrast, the large bay window represents a single investment holding. If a baseball was thrown at both window setups, the multi-paned window would have one section break leaving the others intact. If the baseball broke the large bay window, the results would be far more devastating. This may be the analogous for a portfolio. 

Rather than owning one company in the large picture window, mutual funds provide exposure to numerous companies like a segmented pane glass window. It’s far easier to replace one pane of glass than an entire window. Likewise, if one stock is out of favor, the impact may be less devastating to your portfolio. 

Mutual funds are tools to implement investment objectives allowing you to achieve a desired mix. Beyond that, funds also allow for focusing on specific sectors that investors may think are promising (think oatmeal cookies). Other benefits may include professional management, ease of purchase and sale as well as diversification. 

It may also be helpful to look beyond performance numbers and see who is running the fund, the managers’ tenure, economic outlooks, and additional expertise on the bench. This information may be obtained from the funds’ website, prospectus, or your advisor and should be read carefully before investing. A fund with an impressive record under a specific manager or team may not do as well under other management. Tenure isn’t just about how many years the manager has been in charge; the real issue is what kinds of markets the team has been through and how they’ve performed during those cycles.

In addition to reviewing performance and tenure, analyze how performance was achieved. Managers may have similar results while traveling different roads. One could be a winding mountain trail, or do you prefer a smooth highway? Investors typically choose managers whose overall approach to investing, risk tolerance and volatility match their sentiments.

There are additional complexities and quantitative measures such as Beta, Alpha, R-squared, Sharpe Ratios, etc. that analyze performance and volatility. If you’d like more information on these, please let us know. 

Knowledge is power. Our job is to translate terminology so keep asking questions. Interpret the information, then implement and apply as it may pertain to your overall financial plan. Don’t hesitate to ask for help from an experienced CERTIFIED FINANCIAL PLANNER™ practitioner. Stay focused and invest accordingly.

The opinions expressed are those of the writer as of September 17, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. There is no guarantee any particular investment strategy will be successful. Asset allocation and diversification cannot ensure a profit or eliminate the risk of a loss.

Investors should consider the investment objectives, risks, charges, and expenses of mutual funds carefully before investing. The prospectus contains this and other information about these investments. The prospectus is available from your financial advisor and should be read carefully before investing. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision and is not a recommendation or solicitation to buy or sell any particular investment. Investing involves risk and the possible loss of principal invested. There is no guarantee any particular investment strategy will be successful. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.