Mutual Funds Offer New Investors Convenience, With a Cost
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What is the main topic discussed in this episode?
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Here's your money briefing for Wednesday, April 28th.
What convenience do mutual funds offer new investors and why are they still common in 401(k)s?
I'm J.R. Whelan for The Wall Street Journal. It's investment week. Together with The Wall Street Journal's finance team, we're breaking down the benefits and risks of different assets and explaining how they fit into a diverse portfolio. Yesterday, we talked about how adding bonds to your portfolio can be a way of balancing the risks posed by stocks. Another way to manage your risk is to invest in a whole bunch of stocks and bonds at once through a mutual fund.
It offers you hope. It offers you the potential to do better than average. In other cases, it could offer you the possibility of sidestepping a very bad period in the market.
Today in our Investment Week series, our intelligent investor columnist Jason Zweig will take us through the basics of mutual funds. That's after the break.
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So you want to get into the stock market. You can invest in individual companies, but their stock prices can rise and fall in the blink of an eye. So how about investing in a bundle of companies to spread out the risk? Jason Zweig writes the Intelligent Investor column for The Wall Street Journal. Jason, thanks for taking the time to chat.
Good to be with you, JR.
So, Jason, we hear from all kinds of people making fast money with all these hot tech stocks like Tesla or cryptocurrencies, you know, things that generate fear of missing out. Mutual funds don't get a lot of headlines, and yet they're an incredibly common investment. Why is that?
Mutual funds still remain the best way to invest in your 401k or other retirement plan that might be sponsored by your employer. They're very convenient. They're generally reasonably cheap. It's a quick, easy way to get diversification across lots of assets. And for technical reasons, other alternatives like ETFs are rarely available in 401ks and other retirement plans, while mutual funds are almost universally.
So just briefly, what is a mutual fund exactly?
How does a mutual fund actually work and what assets can it hold?
Well, you could just think of a mutual fund as a bundle or a basket or, I don't know, a supermarket shopping cart full of lots of items. And if it's a U.S. stock mutual fund, it will hold dozens, sometimes hundreds, maybe even thousands of U.S. stocks. If it's an international stock fund, it'll hold a very large number of stocks from other countries around the world. If it's a bond fund, it will hold lots of loans issued by corporations or governments. And it could also invest in other assets like commodities, corn, gold, you know, oil. It could invest in currencies. It could invest in really any other kind of asset that is traded someplace in the world.
All right. So why do these mutual funds exist? What's the purpose that they're providing for someone's portfolio?
The historical justification for mutual funds is that in the 1920s, really, when they developed, they were a cheaper, more convenient way to to get diversified. It used to be very, very expensive in terms both of brokerage commissions and other costs for individual investors to put together a portfolio of many different stocks or bonds for that matter.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–0:38
2
What convenience do mutual funds offer new investors and why are they still common in 401(k)s?
0:38–3:12
3
How does a mutual fund actually work and what assets can it hold?
3:12–5:45
4
Why were mutual funds created and how did they lower costs for individual investors?
5:45–9:01
5
How do index mutual funds compare on cost to active mutual funds and ETFs?
9:01–11:59
6
What are the practical differences between mutual funds and ETFs for everyday investors?
11:59–13:20
Speakers
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