Mutual Funds: Tools for Diversification

by David Jenyns on May 19, 2008

Putting all of one’s stock into one currently successful company can result in financial disaster, but in a comprehensive mutual fund, the past record of a company is a far better guide, for these reasons:

Of course, in a general business recession, comprehensiveness will not prevent a decline in a mutual fund’s income and market value. A mutual fund has no need to hang on to a stock whose prospects are considered poor; and conversely, the fund has no alibi for not owning a stock if its prospects are believed to be better than some of those the fund does own.

Occasionally a fund wakes up and improves on its old record, but with plenty of other funds available, an investor need not buy shares in a reformed fund until the improvement actually shows up in its performance record for several years.

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