All of my money that I am saving for the distant future is invested in mutual funds. It shouldn’t come as any surprise, then, that I think they’re awesome. I think that they are the best way for normal, everyday people like you and me to invest for the future.
What Is A Mutual Fund?
Maybe I should stop a second for those of you new to the investing conversation. Catch you up to speed. If you were just wondering what in the world a mutual fund is, then continue on, let me enlighten you.
Let’s say a bunch of us go to the farmer’s market and we each have a dollar. With my dollar, I can buy one piece of fruit, like an apple. But there are pears and peaches and plums and a bunch of other scrumptious looking things that I simply can’t afford. I only have enough for one piece of fruit.
However, if we all pool our money together, we can buy a bunch of different kinds of fruit. Then each of us can have a little of each fruit. That way everyone gets to sample everything and if one piece of fruit is rotten, no one goes hungry. The other fruit will make up for it and we each get a delicious fruit salad.
A mutual fund works the same way, except that instead of buying fruit you buy investments like stocks and bonds. With only $100 you can’t buy stocks in 100 different companies, but you can buy into a mutual fund that holds stocks in 100 different companies. A mutual fund is just a bunch of people pooling their money together to invest.
Mutual Funds Offer Instant Diversification
“Don’t put all your eggs in one basket.” I’m sure you’ve heard the saying before, and it refers to diversification. You need to have a variety of investments to protect yourself against the ones that don’t work out. Just like with the fruit, you don’t want to be the person that ends up with the rotten apple. By diversifying and having a little of each kind of fruit, you have enough good fruit that you don’t even notice the loss of the rotten piece.
Mutual funds offer instant diversification. You can invest in hundreds of companies by buying into just one fund. If you invest $1,000 in a fund that tracks the S&P 500 (link), you’ve automatically diversified that money into 500 companies. How else can you get that kind of diversification with such little money? And in so little time, too!
Mutual Funds Save Time
Now, when it comes to investing, I could research companies and industries and try to discover which stock is underpriced or which companies are positioned for great growth. But do you know how much time that would take?
I don’t have that kind of time to devote to picking investments. Even if I did, I don’t know that I would make very good choices. I don’t have the experience and knowledge to recognize a hidden gem when I see one.
Mutual Funds Give Me Access To Experts
Instead, I can buy into a mutual fund that has a whole team of super smart people who are experts choosing the stocks for me. These are people who live and breath very specific industries and segments of the economy. They know what they are doing because that’s all they do all day.
Before mutual funds, only the extremely wealthy had access to these kinds of experienced experts. Now we do too.
Mutual Funds Are Easy To Invest In
Finally, it’s really easy to buy into a mutual fund. It’s not like investing in real estate. All you have to do is open an account online, transfer some money, and pick a fund. Boom! In just five minutes you can have a professionally managed, diversified investment portfolio.
So, what do you think? Aren’t mutual funds awesome?