Diversification
If you purchase an individual stock or bond, there is always the risk that you may lose a significant part or all of your money. On the other hand, most mutual fund portfolios contain somewhere between 30 and 250 individual holdings. Therefore, the investment risk is spread across the entire portfolio, and fluctuations in value may be reduced. A decline in the price of one holding may be offset by an increase in other holdings. For this reason, most financial advisors cite diversification as a key investment concept.
Collective Buying Power
Without mutual funds, the average investor may have limited access to the stock market because the price-per-share of many stocks is quite high. Thus, an investor may not have sufficient assets to make a desired purchase and maintain a well-diversified portfolio.
On the other hand, mutual funds provide investors with easy access to the market and require relatively low initial minimum deposits. Consequently, you may make a small deposit and still invest in a quality portfolio. As a result, you and countless other investors can pool money, allowing the portfolio managers to select additional holdings, based on suitability rather than price-per-share alone.
(Mr. Wallace holds NASD Series 7 (General Securities) licenses and Group I and IV Life-Health Insurance Licenses. He is a Registered Representative of MML Investors Securities, Inc., an Investment Advisor Representative of Spectrum Strategies, LLC, and an Investment Advisor Representative and Registered Representative of MML Investors Services, Inc. You may reach him @ ejwallace@finsvcs.com or visit his website at spectrumstrategiesllc.com.)
Professional Management
Mutual funds have a staff of professional money managers. The opportunity to place your hard-earned cash with professional managers who know what they're doing may bring you a little peace of mind. They have knowledge about investments and, generally, several years of money management experience. You can make your deposit and they will do the rest for you. On your behalf, they will:
• Interpret changes in the economy,
• Research company financial statements,
• Read trade and industry periodicals, • Analyze the movement of various investment markets, and
• Find suitable investments for their portfolio.
Convenience
You can use your telephone, the mail, or a computer to receive almost any investor services you desire. In most cases, with a toll-free call, your questions are researched and answered. You can also inquire about special services the fund may provide, such as telephone transfers or check writing privileges. In addition, account statements and tax information are sent to you on a regular basis.
Liquidity
Most mutual funds have many shareholders and large portfolios. They hold publicly traded securities listed on several major exchanges. Therefore, the purchase or sale of shares by you at any time may, in theory, not adversely affect the overall net asset value of your fund. Liquidity means you generally have immediate access to the money in your account.
With several thousand mutual funds readily available, you have almost unlimited access to a mutual fund that mirrors your investment strategy, risk tolerance, asset allocation requirements, or accessibility needs.
Bear in mind, when purchasing mutual funds, past performance is not indicative of future returns. In addition, shares may be redeemed for more or less than their original cost depending on the fund's performance. While there is a potential to increase in value, mutual funds can also decrease in value. Regular financial plan reviews can help you determine how mutual funds can fit into your overall financial picture.
