The market is on a downward trend. Everyone has noticed. The news likes to remind us of that every second. As you know I advocate patience. I advocate staying the course. I do not time the market. I buy into my mutual funds on a systematic steady stream, twice a month.
I know dropping prices can rattle the nerves. This is why I want to make a distinction between stocks and mutual funds. A stock is an individual ownership in one particular company. Regardless of how great the company is, your money is in one company. The expression “all your eggs in one basket” comes to mind. You might say, “I own several individual stocks in order to diversify.” Great, then you believe in diversification but you still have money in individual companies. You probably don’t have enough money to own at least 40 individual stocks. 40 is usually the minimal amount a mutual fund holds. Also how are you keeping track of those individual stocks? Can your broker with all his clients really keep up with yours along with all their clients? Oh, you say you do it yourself? How’s that going? Between work and life that’s another full time job.
Are you beginning to see the inherent problem in individual stocks. If one of the companies panics in this environment you are left carrying the back. Remember Enron? One of, if not the largest, bankruptcies in U.S history. Read about it here. It was hailed as an innovator, but it fizzled like a pretender. Individual stocks are risky—too risky for you and me.
On the other hand there are mutual funds. Mutual funds are made up of individual stocks but grouped together. Not one stock can hold more than about 8% of the fund. Therefore even if you had Enron in your fund it only represented 8% of your money. The other 92% of companies can make up for that loss.
Furthermore, mutual funds are run by professional team of managers. They are pouring over the financials of the companies that comprise their funds. This is what they do for a living. They have the time that you and I don’t have.
A mutual fund offers immense diversity. A mutual fund is comprised of anywhere from 40 to about 250 companies. It is hard for all the companies in a fund to go belly up. If that should happen it is probably the end of the world. We are talking about great companies like Apple, Home Depot, T-mobile, Verizon… all going “belly up.” That is very unlikely.
Mutual funds offer more peace of mind in a volatile market. That is where I put my money, and I share with you what I do for my family and me. Here is a final thought from the Bible.
“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” (Ecclesiastes 11:2)
Even the Bible believes in diversification. That’s the meaning of the verse.
If you have questions don’t hesitate to ask here. Take charge of your money!
Your biggest cheerleader on social media,
P.S. Day 296 please pray for the 7.2 million goal for 2020