Mutual Funds And ETFs – A Great Choice For Your Portfolio

Investing in individual stocks* is an option for your portfolio. However, investing in stocks involves a lot of diligence, research, and discipline. Many of us don’t have the time, money, or fortitude to carry through with an investment plan that includes individual stocks.

Additionally, stock picking can lead to additional stress if you find yourself constantly (daily) looking at your stocks and worrying if you should buy, sell, or hold. If you think you’re the type of person who could unemotionally buy and sell stocks for your portfolio and remain consistent in doing so, then you may be the rare investor where this could be a viable option.

Building a portfolio of stocks also means you must purchase enough stocks – and enough different types of stocks – to have adequate diversification to reduce your risk compared to owning just one or a few companies. This can be difficult to do if your money is limited or the prices of the companies you’ve researched are out of your budget (e.g. as of this writing, Berkshire Hathaway A shares are trading at just over $300,000 per share).

Here’s where investing in mutual funds and ETFs (exchange traded funds) can be beneficial. Some of the advantages of investing in mutual funds or ETFs include instant diversification, economies of scale, professional management, and (generally) lower expenses.

Instant Diversification – Unlike investing in several single stocks to achieve diversification, purchasing just one share of a mutual fund or ETF gives you expose to hundreds, if not thousands of different companies.

Depending on the goal of the fund (large, medium, or small company, US, international, bond, etc.) it will hold a sample of the companies that make up the investment allocation the fund is trying to achieve.

Let’s say you want to invest in the S&P 500 – an index of roughly 500 larger US companies. Purchasing a fund replicating the S&P 500 would get you access to over 500 companies with only one share. The same would be true for a bond fund, international fund; you get the point.

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