On October 9, 2007, the Dow Jones Industrials peaked at 14164. Soon to follow was the great recession which saw the Dow bottom to 6594 on March 5, 2009. As of March 25, 2013, the Dow was at 14512. Talk about a roller coaster!!
Mutual funds are not exciting, in fact they are quite boring. However, they are perfect for a simple investment strategy KISS (keep it simple stupid).
Before we got on a real plan, I played with single stocks. It was exciting; I loved to do the research and use investment principles I learned in my Financial Planning coursework at Boston University. This would include using “PE ratios,” “book value,” and various calculations. I would buy and sell stocks every month with nothing to show except for brokerage trading fees and something to talk about with the guys at the golf course.
Why Mutual Funds?
Mutual funds can’t beat the thrill of picking stocks or being able to talk up a recent stock pick, but they are the best option, especially over time. Here are five reasons why you should invest in mutual funds:
- Diversification: A mutual fund consists of hundreds of stocks. Therefore, you’re not placing all of your eggs in one basket by investing in one stock. If one company goes bankrupt, it is not likely that the other ninety-nine will go bankrupt.
- Simplicity: When properly evaluating a stock, multiple data sets must be used to evaluate the company including revenue forecasts and future earnings. With a mutual fund, your primarily looking at the fund’s goal, track record, risk, and management tenure. There may be a few more, but not nearly as reliant on the technical data unlike picking a single stock.
- Lower brokerage fees: Mutual funds generally have lower fees when buying. You can purchase some that have zero fees (no-load). When purchasing a stock, there is a commission fee. When I traded stocks using Fidelity, I was racking up fees of $19.95 per trade; over time this takes a chunk out of your portfolio unless you are a big-time investor.
- Choices: I like having many choices but with some direction. There are tons of stocks and mutual funds to pick from. However, with mutual funds, it is easy to find out the fund’s objective and if it belongs in your portfolio.
- Management: In a mutual fund, a professionally trained fund manager or team performs the fundamental and technical analysis required to pick stocks. I may be a decent stock picker, but I couldn’t compare to the professionals. Let them do the work for you.
Unless you’re a trained professional, invest in mutual funds. It may not sound sophisticated, but you are more likely to have better returns than if you picked single stocks.
Question: Do you invest in single stocks or mutual funds? Why or why not?