To begin our discussion of mutual funds, we will briefly cover the fundamental investment concepts you will need to know to better understand mutual funds and to give you a foundation with which to make better decisions about your total investment portfolio. In the Chapters that follow, we will engage in more detailed discussions of what you need to build a successful mutual fund portfolio. In this Chapter, we will briefly the following topics:

·         Stocks

·         Bonds

·         Money markets

·         Mutual funds

·         Risk versus return

·         Basic economics

·         Investment returns

·         Evaluating your portfolio

For our investment philosophy we are mainly concerned with mutual funds. As we will describe later in Chapter 3, there are many advantages to owning a mutual fund portfolio. Nonetheless, it is imperative to have a thorough understanding of the other types of investment. This is important for two reasons:

• First, mutual funds are made up of other investments, such as stocks and bonds. Therefore you must understand the mutual fund’s underlying portfolio in order to understand the mutual fund.
• Secondly, it is likely that your portfolio will not always contain just mutual funds. For example, even your house should be considered as a key part of your overall portfolio. Therefore, from a pragmatic point of view, you need to not only understand mutual funds, but the other key components that make up your portfolio.