It’s a mutual-fund jungle out there. Here’s how to create a simple portfolio that works.

1. What exactly is a mutual fund?

A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie.

2. Mutual funds make it easy to diversify.

Most funds require only moderate minimum investments, from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own.

3. There are many kinds of stock funds.

The number of categories is dizzying. Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector, such as technology or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500.

4. Bond funds come in many different flavors too.

There are bond funds for every taste. If you want safe investments, consider government bond funds; if you’re willing to gamble on high-risk investments, try high-yield bond funds, also known as junk bond funds; and if you want to keep down your tax bill, try municipal bond funds.

5. Returns aren’t everything – also consider the risk taken to achieve those returns.

Before buying a fund, look at how risky its investments are. Can you tolerate big market swings for a shot at higher returns? If not, stick with low-risk funds. To assess risk level, check these three factors: the fund’s biggest quarterly loss, which will help you brace for the worst; its beta, which measures a fund’s volatility against the S&P 500; and the standard deviation, which shows how much a fund bounces around its average returns.

6. Low expenses are crucial.

In order to cover their expenses – and to make a profit – funds charge a percentage of total assets. At no more than a few percentage points a year, expenses may not sound substantial, but they create a serious drag on performance over time.

7. Taxes take a big bite out of performance.

Even if you don’t sell your fund shares, you could still end up stuck with a big tax bite. If a fund owns dividend-paying stocks, or if a fund manager sells some big winners, shareholders will owe their share of Uncle Sam’s bill. Investors are often surprised to learn they owe taxes – both for dividends and for capital gains – even for funds that have declined in value. Tax-efficient funds avoid rapid trading (and high short-term capital gains taxes) and match winning trades with losing trades.

8. Don’t chase winners.

Funds that rank very highly over one period rarely finish on top in later ones. When choosing a fund, look for consistent long-term results.

9. Index funds should be a core component of your portfolio.

Index funds track the performance of market benchmarks, such as the S&P 500. Such “passive” funds offer a number of advantages over “active” funds: Index funds tend to charge lower expenses and be more tax efficient, and there’s no risk the fund manager will make sudden changes that throw off your portfolio’s allocation. What’s more, most active mutual funds underperform the S&P index.

10. Don’t be too quick to dump a fund.

Any fund can – and probably will – have an off year. Though you may be tempted to sell a losing fund, first check to see whether it has trailed comparable funds for more than two years. If it hasn’t, sit tight. But if earnings have been consistently below par, it may be time to move on.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 6 here.

The market can be a great place to turn savings into wealth — or to lose your shirt. Here are some fundamentals of investing wisely.

1. Stocks aren’t just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock’s price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year — well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can’t tell how expensive a stock is by looking only at its price.

Because a stock’s value depends on earnings, a $100 stock can be cheap if the company’s earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company’s performance expectations to those of its industry is also common — firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it’s best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It’s smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically — it’s easy to find commissions for less than $10 a trade. But there are other costs to trading — including mark-ups by brokers and higher taxes for short-term trades — that stack the odds against traders. What’s more, active trading requires paying close attention to stock-price fluctuations. That’s not so easy to do if you’ve got a full-time job elsewhere. And it’s especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 5 here.

An introduction to making money in stocks, bonds and mutual funds.

1. Over the long term, stocks have historically outperformed all other investments.

From 1926 to 2010, the S&P 500 returned an average annual 9.8% gain. The next best performing asset class is bonds. Long-term U.S. Treasurys returned, on average, 5.4% over the same period.

2. Over the short term, stocks can be hazardous to your financial health.

On Dec. 12, 1914, stocks experienced the worst one-day drop in stock market history — 24.4% . Oct. 19, 1987, the stock market lost 22.6%. More recently, the shocks have been prolonged and painful: If you had invested in a Nasdaq index fund around the time of the market’s peak in March 2000 you would have lost three-fourths of your money over the next three years. And in 2009, stocks overall lost a whopping 37%.

3. Risky investments generally pay more than safe ones (except when they fail).

Investors demand a higher rate of return for taking greater risks. That’s one reason that stocks, which are perceived as riskier than bonds, tend to return more. It also explains why long-term bonds pay more than short-term bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment’s value.

4. The biggest single determiner of stock prices is earnings.

Over the short term, stock prices fluctuate based on everything from interest rates to investor sentiment to the weather. But over the long term, what matters are earnings.

5. A bad year for bonds looks like a day at the beach for stocks.

In 1994, the worst year for bonds in recent history, intermediate-term Treasury securities fell just 1.8%, and the following year they bounced back 14.4%. By comparison, in the 1973-74 crash, the Dow Jones industrial average fell 44%. It didn’t return to its old highs for more than three years or push significantly above the old highs for more than 10 years.

6. Rising interest rates are bad for bonds.

When interest rates go up, bond prices fall. Why? Because bond buyers won’t pay as much for an existing bond with a fixed interest rate of, say, 5% because they know that the fixed interest on a new bond will pay more because rates in general have gone up.

Conversely, when interest rates fall, bond prices go up in lockstep fashion. And the effect is strongest on bonds with the longest term, or time, to maturity. That is, long-term bonds get hit harder than short-term bonds when rates climb, and gain the most when rates fall.

7. Inflation may be the biggest threat to your long-term investments.

While a stock market crash can knock the stuffing out of your stock investments, so far — knock wood — the market has always bounced back and eventually gone on to new heights. However, inflation, which has historically stripped 3.2% a year off the value of your money, rarely gives back what it takes away. That’s why it’s important to put your retirement investments where they’ll earn the highest long-term returns.

8. U.S. Treasury bonds are as close to a sure thing as an investor can get.

The conventional wisdom is that the U.S. government is unlikely ever to default on its bonds – partly because the American economy has historically been fairly strong and partly because the government can always print more money to pay them off if need be. As a result, the interest rate of Treasurys is considered a risk-free rate, and the yield of every other kind of fixed-income investment is higher in proportion to how much riskier that investment is perceived to be. Of course, your return on Treasurys will suffer if interest rates rise, just like all other kinds of bonds.

9. A diversified portfolio is less risky than a portfolio that is concentrated in one or a few investments.

Diversifying — that is, spreading your money among a number of different types of investments — lessens your risk because even if some of your holdings go down, others may go up (or at least not go down as much). On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin for exactly the same reason.

10. Index mutual funds often outperform actively managed funds.

In an index fund, the manager sets up his portfolio to mirror a market index — such as Standard & Poor’s 500-stock index — rather than actively picking which stocks to purchase. It is surprising, but true, that index funds often beat the majority of competitors among actively managed funds. One reason: Few actively managed funds can consistently outperform the market by enough to cover the cost of their generally higher expenses.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 4 here.

1. Money in a bank account is safe.

A bank is one of the safest places to stash your cash. In an effort to shore up consumer confidence during the credit crunch of 2008, the federal government said it would temporarily insure accounts against loss by up to $250,000 per depositor. After January 1, 2014, the standard insurance of up to $100,000 per depositor returns, excluding certain retirement accounts, which will remain at $250,000 per depositor.

2. You pay for the convenience of a bank account.

Banks pay lower rates on interest-bearing accounts than brokerages and mutual fund companies that offer check-writing privileges. What’s more, bank fees can be high — account costs can easily add up to $200 a year or more unless you keep a minimum required balance on deposit.

3. Inflation can eat what you earn from a bank.

Even at a low rate of inflation, the annual creep in the cost of goods and services usually outpaces what banks pay in interest-bearing accounts.

4. Not all interest rates are created equal.

Banks frequently use different methods to calculate interest. To compare how much money you’ll earn from various accounts in a year, ask for each account’s “annual percentage yield.” Banks typically quote both interest rates and APYs, but only APYs are calculated the same way everywhere.

5. You can get better rates

Certificates of deposit (CDs) offer some of the best guaranteed rates on your money and are insured up to $250,000 each. As with all other deposits, insurance will return to the standard $100,000 in 2014.

The catch: you have to lock up your money for three months to five years or more. If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you’re stuck with the lower rate.

Also with rising interest rates, money market accounts can become an attractive option, too. They pay more than banking accounts and you don’t have to lock up your money for a specific amount of time.

6. ATM fees can take a significant bite out of your budget.

The convenience of using automated teller machines is an increasingly pricey one.On average, the fee your bank charges you to use another institution’s ATM is $1.32, according to a Bankrate.com survey in 2009. That’s on top of the average $2.22 that the other institution will charge you to use its ATM.

7. Getting the best deal takes work.

You won’t get a great deal on a car if you just walk into a dealer and plunk your money down. Likewise, you won’t get a great banking deal unless you comparison-shop and ask about price breaks. For example, a bank might offer free checking if you are a shareholder or if you direct deposit your paycheck.

8. Use the Internet to shop for bank services.

You can use the Internet to compare fees, yields, and minimum deposit requirements nationwide. Sites like Bankrate.com allow you to search and compare the highest yields and the lowest costs on banking, savings, loans and deposit rates nationwide. You can also search by geographic location or use CNNMoney.com loan center.

9. Banking online can make bill-paying easier.

Electronic bill-paying can save you the monthly hassle of paying your bills. And if you couple online banking with a personal-finance management program, such as Quicken or Microsoft Money, you’ll be able to link your banking with your budgeting and financial planning as well. But be careful. Some vendors only warn the consumer of price hikes in the fine print of a bill.

10. You can bank without a bank.

A number of financial institutions offer accounts that resemble bank services. The most common: Credit union accounts; mutual fund company money market funds; and brokerage cash-management accounts.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 3 here.

How to bring your spending under control, so that you get the most out of every dollar.

1. Budgets are a necessary evil.

They’re the only practical way to get a grip on your spending – and to make sure your money is being used the way you want it to be used.

2. Creating a budget generally requires three steps.

• Identify how you’re spending money now.
• Evaluate your current spending and set goals that take into account your long-term financial objectives.
• Track your spending to make sure it stays within those guidelines.

3. Use software to save grief.

If you use a personal-finance program such as Quicken or Microsoft Money, the built-in budget-making tools can create your budget for you.

4. Don’t drive yourself nuts.

One drawback of monitoring your spending by computer is that it encourages overzealous attention to detail. Once you determine which categories of spending can and should be cut (or expanded), concentrate on those categories and worry less about other aspects of your spending.

Getting control of spending and managing your personal finances can be a daunting task for anyone. The following is the first in a series of ways in which you can save money, manage your finances, reduce your debt and build your financial future.

1. Narrow your objectives.

You probably won’t be able to achieve every financial goal you’ve ever dreamed of. So identify your goals clearly and why they matter to you, and decide which are most important. By concentrating your efforts, you have a better chance of achieving what matters most.

2. Focus first on the goals that matter.

To accomplish primary goals, you will often need to put desirable but less important ones on the back burner.

3. Be prepared for conflicts.

Even worthy goals often conflict with one another. When faced with such a conflict, you should ask yourself questions like: Will one of the conflicting goals benefit more people than the other? Which goal will cause the greater harm if it is deferred?

4. Put time on your side.

The most important ally you have in reaching your goals is time. Money stashed in interest-earning savings accounts or invested in stocks and bonds grows and compounds. The more time you have, the more chance you have of success. Your age is a big factor – younger people (who have more time to build their nest egg) can invest differently than older ones. Generally, younger people can take greater risks than older people, given their longer investment horizon.

5. Choose carefully.

In drawing up your list of goals, you should look for things that will help you feel financially secure, happy or fulfilled. Some of the items that wind up on such lists include building an emergency fund, getting out of debt and paying kids’ tuitions. Once you have your list together, you need to rank the items in order of importance.

6. Include family members.

If you have a spouse or significant other, make sure that person is part of the goal-setting process. Children, too, should have some say in goals that affect them.

7. Start now.

The longer you wait to identify and begin working toward your goals, the more difficulty you’ll have reaching them. And the longer you wait, the longer you postpone the advantage of compounding your money.

8. Sweat the big stuff.

Once you have prioritized your list of goals, keep your spending on course. Whenever you make a large payment for anything, ask yourself: “Is this taking me nearer to my primary goals – or leading me further away from them?” If a big expense doesn’t get you closer to your goals, try to defer or reduce it. If taking a grand cruise steals money from your kids’ college fund, maybe you should settle for a weekend getaway.

9. Don’t sweat the small stuff.

Although this lesson encourages you to focus on big-ticket, long-range plans, most of life is lived in the here-and-now and most of what you spend will continue to be for daily expenses – including many that are simply for fun. That’s OK – so long as your long-range needs are taken into consideration.

10. Be prepared for change.

Your needs and desires will change as you age, so you should probably reexamine your priorities at least every five years.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 1 here.