What kind of fund do you have?

What are some of the vocabulary terms that people need to know?

I’ve been writing about this for about 10 years and people have no idea what the words mean or what the importance of the words are. So they’ll typically call me and say, I have a mutual fund and it’s losing money or I have a mutual fund and my friends are doing much better. Should I sell my fund? Well, the fact that it’s losing money is absolutely irrelevant if it’s a certain type of fund in a certain type of stock market.

For example, in the year 2000, almost every mutual fund that invested in stocks was losing money. The fact that your mutual fund was losing money didn’t mean anything because if you were invested in the stock market, you were going to be losing money. What would’ve been important is if you were losing more money than other funds like yours.

If you’re investing in large stocks, you would compare your fund to the index that includes large stocks, and that’s the Standard & Poor’s 500 index. When Wall Street refers to the stock market, they are referring to that index. It’s a rough measure of the stock market, even though it only includes 500 large stocks. But if you have a fund and you are paying a fund manager to select stocks for you and your fund manager is choosing only large stocks and the stock market has been climbing about 8 percent a year and your fund is climbing about 5 percent a year, then you might have a problem if that continues for two or three years.

The funds in a 401(k). or anywhere actually, are divided into three different categories.

Three basic asset classes:

• Stocks. There are stock funds, and sometimes you will see the word equity on those. Rather than worrying about the word equity when you see it, just think stocks.
• Bonds. Then there are bond funds, but sometimes those are called fixed income because bonds are supposed to guarantee you a certain interest payment regularly and that means fixed income. So they’ll call it fixed income, but when you see the words, just think bonds.
• Cash. When experts talk about cash, it could mean money in a savings account or money market fund — money that is going to be very, very safe and is not going to grow much at all. People think they want that because it’s safe — they can’t lose money in it — but if they’re saving for many, many years, that’s actually dangerous because the money grows at such a small pace. People might think that’s safe — and it is; you’re not going to lose any money — but you’re not going to make enough money.