Putting your money into individual stocks may be the fastest way to get rich – but it’s also the fastest way to lose the shirt off your back if you guess wrong. Buying a single stock exposes you to high levels of risk, even if the stock is strong. And even if you’re an expert on the company and its industry, there’s no certainty that the market won’t take an unexpected turn at any time and your stock won’t perform as well as you’d hoped. For this reason, it’s important to diversify your portfolio. If you have a diversified portfolio, any possible losses will hopefully be offset by a gain in a different stock.
Another disadvantage of buying individual stocks is that trading them can be very expensive. If you’re a high-volume trader, the multiple transaction costs involved in beating the market and selling your less profitable stocks take their toll.
Additionally, if you are thinking of purchasing individual stocks, ask yourself whether you have sufficient knowledge to choose these investments yourself. Do you have time every day to follow the market and stay in tune with the latest economic forecasts? The economic world is in constant flux and you need to be ready to adjust your portfolio to keep up. Do you really have the time and energy to devote to this, when you are also busy with your work and family?
So what’s the most effective way to invest?
For many people, the answer is mutual funds.
A mutual fund is a collection of securities, most often stocks and/or bonds. Every person who invests in a mutual fund is essentially a shareholder of this basket or collection of investments. The losses and gains of the fund reflect the movements of the individual assets inside the fund. A mutual fund solves the problem of diversification and the fund managers are the ones who have the responsibility of researching and making investment decisions. Though they may not get it right all the time, at least they have the time to investigate their ideas.
It’s important to note that with mutual funds, there’s no such thing as “one size fits all.” Different types and styles of mutual funds are appropriate for different kinds of investors. Indeed, a mutual fund’s value may be the time when the whole is really greater than the sum of its parts.
Call your financial advisor today to find out which fund may be best suited to meet your goals.Doug Goldstein, CFP®