Most experts agree that it's more effective
to invest in a variety of stocks and bonds than to depend on a
strong performance of just one or two securities. But diversifying
can be a challenge because buying a portfolio of individual stocks
and bonds can be expensive. And knowing what to buy — and
when — takes time and concentration.
Mutual funds can offer a solution. When you
put money into a fund, it's pooled with money from other investors
to create much greater buying power than you would have investing
on your own. The fund uses that pooled money to build a diversified
portfolio. Since a fund may own hundreds of different
securities,
its success isn't dependent on how one or two holdings do.
Limits of diversification
You should be aware, though, that funds tend
to focus on the segment of the market that fits their investment
objectives. A fund whose objective is long-term growth in large-company
stocks will suffer in a period when large-company growth is depressed.
While funds have some freedom to make other types of investments
to improve their returns, they may be limited from straying too
far from what their name or their objective implies.
Style drift A fund that changes its investment style or alters the types of investments it makes is said to be guilty of style drift. The risk is that style drift could alter your diversification without your being aware of it. One clue may be a fund that has much stronger short-term performance than other funds with the same objective.
Mutual funds can offer a solution. When you
put money into a fund, it's pooled with money from other investors
to create much greater buying power than you would have investing
on your own. The fund uses that pooled money to build a diversified
portfolio. Since a fund may own hundreds of different
