You've been a conservative saver all your life, content with bank certificates of deposit -- but now you're feeling uncomfortable. Interest rates are woefully low, the stock market is hot and most of your friends seem to be accumulating more money than you.
Is this finally the time to move into the world of mutual funds, which invest in a huge pool of stocks to diversify risk?
It probably is. But how do you start? Where do you begin to pick from today's universe of more than 3,400 mutual funds? And are mutual funds of any type right for you?
Here is some help to begin deciphering the world of mutual funds, and, yes, mutual funds of one sort or another are right for you. The array of funds is vast enough to appeal to anyone.
Even if you abhor risk, you can park your money in super-safe money market funds -- or their close cousins, money market-plus funds -- and earn at least one percentage point more than you can get from a bank money market account. And for investors with a long-term orientation, good stock mutual funds are a sure bet to produce fatter returns than you'll ever enjoy at your local bank or thrift.
Here are three major pointers:
1. Novice fund investors should move slowly.
Don't invest in mutual funds until you have some money in the bank to cover emergencies, and your first funds should be no riskier than bond funds that invest in paper with maturity of no more than five to seven years. In essence, this is the next layer of savings -- riskier, but not too risky, and a highly liquid investment that usually retains most of its principal whenever you decide to sell your shares.
Once you're comfortable with a bond fund, the next step should be an investment in a conservative, "plain vanilla" stock fund that invests in at least 125 blue-chip, dividend-paying stocks. Information on the names of these funds and others, as well as mutual fund investment primers, can be obtained by calling the toll-free numbers of major mutual fund families.
Three good places to start are T. Rowe Price, (800) 541-0295; Fidelity Investments (800) 544-8888; and the Vanguard Group, (800) 662-7447.
2. If you're ready to move beyond a plain vanilla fund, the decision about which funds make the most sense depends on your return requirements, the length of time you're willing to keep money in the fund and your tolerance for risk.
Most investment advisers say people shouldn't look at the 1980s -- when the Standard & Poor's 500 returned an unusually hefty annual average of 17.5 percent a year -- as a realistic performance benchmark for the stock market. Over a greater span of time, stocks, including dividend reinvestment, have risen at an annual average of 10 percent.
Some aggressive funds no doubt will beat this handily in the 1990s -- but probably not without exposing investors to substantial volatility.
Mutual fund investors shouldn't consider stock funds unless they're willing to keep their money in the fund at least three
years; five years is even better, fund experts say. This gives stocks more time to recoup losses. Studies have shown that the odds of losing money in the stock market drop from 30 percent in one year to less than 20 percent after five years.
3. Tolerance for risk is the most important consideration of all.
Most people prefer an adequate return with relatively less risk, investment advisers say. You might be an exception -- if you're bothered more by the market's exploding and leaving you way behind than you are by watching the value of your stock fund decline by 20 percent in a month.
Predictably, stock fund investors face other considerations as they sift through stock funds. Here are three:
* Decide whether you insist on investing in a no-load fund -- one that charges no sales commission.
Many mutual fund experts, such as Burton Berry, publisher of No Load Fund-X, a San Francisco newsletter, say investors should stick with no-load funds exclusively because they are cheaper and hundreds of good ones are available. But others, such as Eric Kobren, publisher of Fidelity Insight, another newsletter, say commissions are overwhelmingly important.
"A load may be the price of admission in a mutual fund family you're comfortable with," Mr. Kobren said. "Fidelity Investments, for example, typically charges a load, but it offers 130 funds, round-the-clock service and 'walk-in' centers across the country. There is value in all of this."
* Decide whether you want to stick with one good fund or eventually invest in several.
Some investment professionals say one good fund is often sufficient, especially if you don't have the time to monitor more. But others say investors are better off in several funds because different funds have different approaches that work well in some years but not in others. Many once-laudable funds eventually stumble, they add.
If you think you should be in several funds, experts say, strongly consider putting some of your money into an international stock fund. U.S. stocks now account for only 35 percent of the value of stocks worldwide, down from 65 percent in 1980.
* Decide how much effort you want to put into monitoring your funds. Investors should compare the performance of their funds against comparable funds at least twice a year, some experts say, and pay special attention when a fund selects a new portfolio manager. A new manager may produce distinctly different results, they say.