Why Use Mutual Funds?

Why do you use mutual funds instead of individual stocks in your investment strategy?

While teaching my elementary school-aged kids math and averages back in the day, I used a deck of cards with just the numerical cards, numbers two through ten. We would play for an M&M, and they would choose any single card that they wanted. So, I picked ten random cards, and we would average those to see who had the more significant number and the candy. Sometimes they lost, and sometimes they won. But my long-term results with the average of those ten cards left me very few surprises and kept me well supplied in chocolate.

I would be willing to risk drawing a two or a three instead of a nine or a ten for a piece of chocolate candy. But I am not going to do that with my goals and with my clients’ aspirations.

Investing in the utilization of low-cost mutual funds is one of the best ways to spread out your risk. Period.

Low-cost funds holding stocks (or bonds) within a particular sector or allocation of a market’s securities give us the benefit of reduced risk on the returns of a single stock or bond. And with that, we increase our probability of staying on track with our goals for that investment.

Of course, we can purchase individual stocks, but we should do that with monies not devoted to our plan, dreams, or goals and invest in a way that allows us to achieve those dreams with the least amount of risk possible.

A mutual fund ensures that we diversify the risk between companies with sound financials, solid backgrounds, and future potential from those posing as those same sound companies.

With something as important as your goals, we do not want the additional risk of choosing individual securities. I’d love to be the guy that finds the next Facebook or Tesla. Likely I already have, but I do not know it yet. It is probably already sitting in my portfolio in one of my mutual funds.

If I think that I can go and find that next Facebook or Apple, then I should do that with monies that I can afford to lose or have diminished in value. Using only these three exchanges, NYSE, AMEX, NASDAQ, we find around 8000 stocks are listed on these exchanges in a given year. Roughly 1,000 new companies make it onto these same exchanges in a year through chiefly IPOs. Loosely translated, then about 1000 stocks or companies must be delisted. They go bankrupt or merge or consolidate or cease to exist. I would not want to think that my retirement is tied to one of those failing and flailing stocks. Maybe with an M&M, I will play those odds. But not with my goals.

With something as important as your retirement, your second home, gifts to your family, or your long-term independence, why choose the winners from the losers in the stock market? Let the portfolio of carefully selected, weighted, and rebalanced mutual funds do the work for you.

Tim Eichhorn is a Senior Advisor and Partner at Rather & Kittrell. Tim can be reached at [email protected].