By: Vicki Erickson

The sheer number of investing options can be overwhelming for new investors. This is especially true of those who feel compelled to pick and choose individual stocks, which can be time-consuming and risky, especially if they don’t understand the underlying fundamentals.

I recently spoke with Ramsey Brock, president of Brock Asset Management, who explained that mutual funds can be an excellent option for new investors. As a portfolio of stocks, bonds, and other securities, mutual funds offer several noteworthy advantages — which is undoubtedly why 52.3% of households in the United States own mutual funds.

1. Diversification

One of the first reasons Brock feels new investors should use mutual funds is the natural diversification that they offer. “Diversifying your assets is one of the important strategies for lowering portfolio risk, but it can be very challenging for new investors to do this effectively by picking out individual stocks,” he notes.

“Purchasing mutual funds instantly gets you that diversification because you invest in a portfolio rather than an individual stock. For optimal diversification, look for mutual funds not specific to a single sector or industry. More diverse funds, such as those that track a trading index, are generally the safest option.”

2. Easy-to-Set-Up Auto Investment

Another benefit Brock sees in mutual funds is that they are well-suited for long-term investments, particularly because they enable investors to set up automatic contributions to their accounts.

“We generally recommend that new investors set up automated transfers on at least a monthly basis,” he explains. “All you have to do is link your bank account to your investment to set up these automatic transfers, and you will steadily grow the value of your investment over time. This enables you to take greater advantage of compounding interest while also helping to remove some of the emotional factors that can lead to unwise investing decisions.”

3. Helps Reduce Temptation to Time the Market

The ability to set up automatic transfers isn’t the only way that using a mutual fund can remove the emotional side of investing from the equation. Unlike traditional stocks or ETFs, shares in a mutual fund cannot be traded throughout the day. Instead, the mutual fund’s net asset value and pricing are typically settled at the end of the trading day, when any trading actions are processed.

Brock explains, “Since mutual funds don’t give you the option to perform a real-time trade, so to speak, this greatly reduces the temptation to time the market, a trap that new investors often fall into as they try to buy low and sell high. That behavior often results in mistiming their sales and purchases and racking up transaction fees to go along with investment losses. It helps encourage spending more time in the market, which is best for new investors.”

Indeed, attempting to time the market is more likely to lead to missed opportunities or additional tax consequences, while focusing on holding a position in a mutual fund will typically deliver better long-term gains.

4. Mutual Funds Are Professionally Managed

Another reason new investors can be comfortable using mutual funds is that they are professionally managed. “A professional investment manager oversees every mutual fund,” Brock explains.

“The investment manager is the one who determines which assets belong in the mutual fund’s portfolio, and they are responsible for managing its asset allocation to ensure that it delivers on its investment objectives. This is complicated work, and it can be incredibly time-consuming to assemble a similar portfolio independently. Having a mutual fund gives you the benefits of professional management for a more convenient and stress-free investing experience.”

Of course, Brock also notes that not all mutual funds are created equal. He advises that new investors review the mutual fund’s historical performance and the reputation of the investment manager to ensure the fund seems like a good fit for their financial goals.

5. A More Liquid Investment

While Brock encourages new investors utilizing mutual funds to try a “buy and hold” strategy, allowing their investment to grow for as long as possible, it’s also worth noting that mutual funds are also worthwhile as a more liquid investment option.

This stems from the lower risk associated with mutual funds compared to stocks. For example, if a household faced a financial emergency and needed to withdraw funds from their investment account, they might not have as much money as expected if their chosen stock lost value. The more diversified nature of a mutual fund means its value is less vulnerable to sudden dips, which makes it a safer option if you anticipate this potential need.

Make Mutual Funds Your Best Friend

As Brock’s insights illustrate, mutual funds offer several noteworthy advantages for new investors. By working with a qualified financial professional, you can find a mutual fund that matches your investing goals and risk tolerance and then utilize straightforward strategies like auto investing to generate reliable returns. While no investment is ever without risk, mutual funds represent a relatively low-risk option enabling just about anyone to start investing.

Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.

Published by: Josh Tatunay