It’s easy to look at the past couple of decades and kick yourself in the buttocks for all the investment paths not taken. What if, for instance, you had just put some money into a little stock called Amazon.com back in the late ’90s?
Fantasies of big payoffs often don’t consider the downside: Most big bets don’t pan out. The stock market graveyard is littered with thousands of defunct companies that took the hopes and dreams of investors, along with their money, down with them.
“When you go into a very narrow strategy, you either win big or lose big,” says CFP professional Michael Silver, partner at Baron Silver Stevens Financial Advisors in Boca Raton, Florida.
Diversification across investments lowers the risk of a big loss, but it also mitigates the likelihood of a home run. That’s why most small investors are better served by investing in mutual funds or ETFs. But check, some mutual funds are more diversified than others.
Diversified mutual funds are designed to protect an investor’s assets. Diversification can be achieved in different ways, but could involve investing in industries or asset classes that are non-related. In the event that one group in which a mutual fund is exposed to loses value, those losses have a chance of being offset by the other investment category.
While some funds are actively managed by individuals who select the stocks and try to get you the best return on your investment, indexed funds are more passively managed and because of this typically have lower associated fees.
An indexed fund invests in a way that closely follows a certain financial index. Popular indexes are the Dow Jones Industrial Average and the S&P 500 and funds following either of these indexes “track” to the stock market in general. But, you can also invest in funds that track a sector, such as oil, technology, finance, consumer goods, and on and on.
Tracking can be achieved by trying to hold all of the securities in the index, in the same proportions as the index. Other methods include statistically sampling the market and holding “representative” securities. Many index funds rely on a computer model with little or no human input in the decision as to which securities to purchase and is therefore is much more passively managed.
Index funds are available from many investment managers.
When investigating what fund to purchase, look at “total return.” That’s the return rate on your investment after fees and expenses. It includes value changes and dividends the mutual fund pays.
The sales Charge is called “Load” in the mutual fund industry. There are funds called “No Load” which have no sales charges whatever. Some are index funds. Some are managed funds.