Joel Dresang: Adam, when most people talk about investments, they’re talking about stocks and bonds, but you actually build portfolios using predominantly mutual funds. Let’s talk about mutual funds. First of all, how about a definition?
Adam Baley: Mutual funds are where people come together and pool their resources towards a common investment objective. The mutual fund managers are in charge with investing that pool of money towards investor objectives, and as a share owner you get to participate in the gains or losses of the fund.
Joel: So they have different objectives. So it’s not like all of my money is going where all of your money is.
Adam: Certainly you wouldn’t want just one fund. Everybody’s needs are a little bit different. You can blend together different types of strategies and various roles in your portfolio. For example, using stock funds alongside of bond funds allows you to get some diversification and balance, and helps to smooth out the ride for investors.
Joel: So there’s a wide variety of funds. I think there are like 9,000-some mutual funds. Are there common benefits from mutual funds instead of buying individual stocks and bonds?
Adam: Certainly. Professional management, diversification and affordability.
Joel: Let’s talk about each of those. So, first of all, professional management.
Adam: Mutual funds employ a full-time dedicated staff of managers and analysts, which work together. And they scour the market. They sift through company financial records. And they do their best to find areas of opportunities, while simultaneously avoiding areas of vulnerability. And that strategy, that active management strategy, when done well, can lead to better returns for less risk.
Joel: And you talk about diversification. That’s the concept of, you shouldn’t put all of your eggs in one basket.
Adam: Research shows that more than 90% of investor returns comes from one thing and one thing only: It’s your mix of stocks and bonds. Not stock picking, not market timing, just something as simple as your diversification. Inside a single mutual fund, there are dozens, if not hundreds, of individual securities. It’d be very difficult for any investor, even well-off ones, to match the diversification inside of a single fund, let alone a portfolio of several mutual funds.
Joel: So can I, as a long-term investor, put together a whole portfolio just with mutual funds?
Adam: You certainly can. You can get the job done with a portfolio consisting just of mutual funds. Nothing wrong with that. But maybe as you get a little bit older, as your account balance grows, maybe as your strategy becomes a little bit more sophisticated, it could make sense to blend in some other financial vehicles.
Mutual Fund 101
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For example, exchange traded funds, which typically are a little bit more affordable than their mutual fund counterparts. I like the idea of blending together both the active side of mutual funds alongside the passive side of some exchanged traded funds. It gives investors a relatively affordable way to get broad diversification and professional management, essentially allowing people the ability to put together a portfolio that meets their needs.
Adam Baley is a registered representative and investment advisor at Landaas & Company.
Joel Dresang is vice president- communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Peter May
Learn more:
Talking Money: Mutual Funds, by Adam Baley
Mutual Funds, from the Financial Industry Regulatory Authority
Mutual Funds: A Guide for Investors, from the Securities and Exchange Commission
(initially posted March 31, 2016)
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