The news is full of stories about the latest hot stock – a rapidly growing company benefiting from an innovation or recent market demand. Wouldn’t it be helpful to capture that growth for your investment portfolio?
No doubt it would, if one had the ability to pick individual stocks before they rise, and sell them before they drop. Achieving that, unfortunately, is a nearly impossible forecast known as “market timing.” Those who try may often find their portfolio value dropping, as they end up buying individual stocks at higher prices, and selling them at lower prices in reaction to a drop.
That challenge has led many investors and financial advisors to explore the value of investing in an array of mutual funds to build a broad portfolio, versus attempting to choose individual stocks or bonds.
The idea behind mutual funds is simple: a number of people with shared objectives pool their money so that it can be invested by professionals in a variety of securities. Each fund typically holds a selection of individual stocks or bonds, allowing you to spread your money across a number of holdings.
As The New York Times (5/12/17) reports: A new study by Hendrik Bessembinder, a finance professor at Arizona State University, demonstrates persuasively that while investing in the overall stock market makes sense, the obstacles facing individual stock pickers are formidable. It can be much less daunting to invest with diversified low-cost mutual funds.
Through mutual funds, you can access some of the more appealing features of a smart investment plan, such as diversification, liquidity, convenience and flexibility. While diversification and asset allocation do not ensure a profit or protect against loss, they can help reduce the overall risk and volatility of your investment portfolio.
There are mutual funds for all different asset classes and types of investments. Each fund generally holds a variety of individual stocks or bonds, allowing you to spread your money across a large number of holdings.
Mutual funds offer a variety of different services to shareholders, including automatic investment plans, the reinvestment of dividends, if desired, as well as quarterly statements, and semi-annual and annual reports on holdings. They allow you to focus on a long-term growth plan and worry less about choosing individual stocks or bonds consistently.
With literally hundreds of thousands of stocks and bonds to choose from, how can you possibly track and choose the “hot” ones from the declining ones? By spreading your money across several investments through mutual funds, you access opportunity across asset classes and work to manage your risk exposure. Even better, you can look at mutual fund holdings to see which ones give you access to that certain stock you’ve had your eye on.
Working with your financial advisor, you can create a customized and personal investment portfolio based on your needs and goals.
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This information is provided for educational purposes only and may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to assist in understanding the issues discussed. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Waddell & Reed does not provide tax or legal advice. Please consult with the appropriate professional regarding your personal situation prior to making any financial related decisions.