Whenever we talk about investing in the stock market, we almost always recommend doing so in the form of collective investments. Collective investments are those structured so that a variety of individual stocks are assembled to basically form one investment, and the investor purchases shares of that one investment. The mutual fund is probably the most well-known of the collective investment options, while another vehicle, the exchange-traded fund (or ETF), has seen its popularity grow in recent years, as well.
The reasons for looking to collectives as a way to enter the stock market have always been good, but are probably even better and more important now, in light of the recent economic collapse that has touched all of us. While there are many reasons to opt for funds when considering the stock market, here are three of the best:
Diversification –
Professional Management – When you buy a mutual fund or managed ETF (ETFs are generally unmanaged because historically they’ve only tracked indexes like the S&P 500, but more and more ETFs with the feature of active management are coming to market), you receive the benefit of having the underlying portfolio of stocks you’re purchasing overseen by professional asset managers who are paid based on the ongoing performance of the fund. Not only, then, are you relieved of the mechanical processes and details associated with assembling your own portfolio of stocks, but you are also relieved of having to actually manage the stocks and determine the best time to buy and sell.
Lower Costs - Collective investments, by their very structure, give you the ability to keep your costs much lower than if you sought to own the same number of individual stocks on your own. In the same way that insurance costs are lower when there are more consumers in the pool over which to spread those costs, the same general principle applies with mutual funds and ETFs. Annual fund expenses are generally quite low, and can be even lower with ETFs, precisely because they are usually unmanaged and also because their goals of tracking indexes don’t demand the portfolio turnover that can result in greater tax liabilities to the fund.
As the securities markets continue to evolve, and as global markets become much more complex and interrelated, it will be even more difficult to profitably select and manage one’s own portfolio of individual stocks. Granted, owning several different mutual funds may not sound as exciting as saying that you own shares of Microsoft, or Apple, or General Motors (maybe nobody needs that much excitement any longer, anyway), but in the quest to realize long-term investment success through markets and economies characterized by increasing complexity and less predictability, it’s going to be the smartest way to go.
James L. Paris and Robert G. Yetman, Jr.
Christian Financial Planner
None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.