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Jun252014

08:33:42 pm

ETFs & Mutual Funds: Better Than Stocks - Yahoo Voices

There is a large group of traders who have in the market for decades who have previously dabbled in single stocks, and are now focusing their investments in exchange traded funds and mutual funds. There are several reasons for this. Mutual funds and ETFs are much more diversified than single stocks. When you hold an individual stock, you expose yourself to the risk of huge losses if there is any bad news for that particular company of the industry that company is in.

In a single day, a stock can drop as much as 10% to 20% when an unfavorable piece of news hits, or a company misses analyst expectations. These are big solid companies too, not just penny stocks. Major corporations such as Amazon.com, McDonalds, Apple, Kodak, household names are affected by these market swings on a regular basis. Mutual Funds and ETFs can also drop in price, but not nearly as much, because they are so diversified. Even if one or two stocks drop dramatically inside the mutual fund, there's a good chances that another 2 had fantastic days, and it will even out. This way when a couple of the companies that you are holding go down dramatically in a single day, you are much less likely to get hurt by it.

If you have a limited amount of money that you can invest, normally you wouldn't be able to buy very many shares of one single stick. This would prevent you from having a great amount of diversification. You are then vulnerable to swings which can be as much as 30% in one day! With mutual funds, there is a very small and reasonable management fee, however it's nothing compared to the huge benefits you will reap.

You also have the benefit of professional management inside a mutual fund. Mutual Fund managers spend all day every day figuring out which stocks you should buy and sell. They have access to every stock in the world on a real time basis and have teams of research analysts to examine annual reports, interview company executives, visit company sites, and review market trends. Mutual fund companies also have massive computer resources in order to determine which stocks are appropriate to buy, and there's just no way that one individual investor could compete with this mass of knowledge.

Finally, mutual funds will save you a lot in fees as opposed to if you were just to buy the stocks that the mutual fund had. You would have to pay $15 or so a pop for each stock that you buy and sell, but with a mutual fund, the entire mutual fund's fee is only $15, and it gets to be split among the thousands of investors in the mutual fund, so the expenses are much less.

Overall, mutual funds and ETFs are the way to go. There is substantially less risk, and when you get a high quality mutual fund manager, you will always make more money than by playing around with single stocks


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