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metrosomething | Most investment advisers tell their clients to purchase shares in one or more mutual funds.... .? |
rather than to buy individual stocks. They urge this reduces risk ....why do they do this ?
Looking to see if the people in here actually know the basics |
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William
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Well a mutual fund is made up of a group of stocks. It can be like stocks or index type stocks. When you invest in a mutual fund you limit your risk on an individual stock driving your investment down, you can also argue you limit your upside if a buyout occurs. In investing in mutual funds, you do want to be careful in picking funds. A lot of time if you pick 5 or 6 funds you might find they have 90% of the same stocks and thus your investment isn't so protected, that's why I think being invested in one fund in each sector is a little better. |
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Meg N
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Suppose you put all your eggs in one basket and then the basket falls, you lose it all right? But if you had them in two or three separate baskets, then even if one basket would have fallen, you would have been alright with the other two. A similar analogy works in the world of investments. Mutual Funds invest in a number of stocks and therefore are "diversified", so even if one stock under performs they recover their money in other stocks. However, that's not the end of the story, when picking a fund, make sure you pick one with 'Low Turn over", that is the ones that don't trade their holdings too often and one that has a low "expense ratio", you can and have the right to get this information from the company or from yahoo finance or any other site. |
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michaelsgdec
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The other answers are kinda interesting, most only talk about diversification. While it is true that you can get a basket of stocks and/or bonds with a single mutual fund, that's not why the adviser is interested selling mutual funds. The adviser is interested in making money, in the form of from of front-end loads, back-loads, management fees, commissions etc. THAT is why they are telling you mutual funds reduce risk - they are simply advertising their product. That's not to say I'm against mutual funds, on the contrary, if you choose the funds you invest in wisely, the fees you pay may be well worth it. The average mutual fund, however, fails to beat the broad market indices over the long term, because they always have fees eating away at their performance. |
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Franco
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If you are just testing us, then you can stuff your question and go take a jump. Twerp. |
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aa2j
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Because mutual funds are diverse there are much less chances that all the stocks in the mutual fund would go down at the same time than an individual stock would go down. That means less risk for the investor. The same is true for winning - a fund offers less chances of a huge win because the same way there are less chances that all the stocks of the fund will go up considerably at the same time. But risk management is more important than the management of winning trades. If you take high risk and win several times when you have a huge loss you may be done for good. For example if you risk 50% of your balance to win 50% of your balance, at this rate if you loose once you need to win 2 times in order to be "in positive." At 50% risk in one trade if you loose you lost half of your balance but if you win you do not get double your balance (that is you do not get 200% but 150%). That's why money management is very important especially if you increase the amount risked as your balance increases. |
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piet lul
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good advice. |
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Billie
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Have you heard about putting all of ones eggs in a (single) basket? Read slowly and see if it resonates anything.
Yes, I know the basics. |
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ralph
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Because mutual funds invest in multiple stocks so your investment is diversified. If you invest in one stock and they suddenly announce they are recalling their products because of lead paint that stock is going down. If that stock is owned in a mutual fund, it is only one stock out of maybe 20 they invest in. |
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Nikolas M
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I suppose they do this to cover their own tail. And some people who have investment advisers don't understand the risk and reward of investing that well. Many people, as demonstrated by their actions, don't believe it is acceptable for their portfolio to be down 20% in the near-term even if they had reason to believe that it would be worth ten-fold in twenty years. Investment advisors probably figure that the volatility in a small basket of individual stocks just isn't worth all of the drama. |
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L L
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The rule of diversification, minimize the risk.
Life is risky business.
Knowledge is virtue, learn and master what you like to do, then do it yourself.
Professional and the best is two different things.
I love to hire the best to invest my money, I won't pay for the professionalism.
Come time to make money, I rather do it myself. |
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pakyaw8
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Because even investment adviser don`t really know what will happen to the market in the next hour never mind in the next month or years.They make educated guess or calculated risk.
So if your investment on one side is not going to make money perhaps the other side will. |
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