When you buy a mutual fund, which invests in many different securities, you automatically achieve a degree of diversification, which is a huge advantage. You also get the expertise of professional money managers.
On the other hand, stocks may offer the potential for bigger gains than mutual funds. Plus, since you decide when to sell your stocks, you determine when to take taxable gains. And when you buy a stock, you typically just have to pay a one-time commission, as opposed to the sales charges and maintenance fees charged by mutual funds.
As you can see, both mutual funds and stocks offer attractive features. Ultimately, a combination of both stocks and funds may be the best way to meet your long-term goals. Remember, both stocks and mutual funds are subject to market risk, including the potential loss of principal invested.
Be Aware of Different Types of Investment Risk
If you think stocks are too risky, you may look at other investments. But they, too, carry risks.
For example, if you hold a bond or certificate of deposit until maturity, your principal will be preserved, as long as the issuer remains solvent. However, bonds, CDs and other fixed-income vehicles may not pay a high enough interest rate to keep up with inflation -so you’re risking your purchasing power.
Furthermore, fixed-income investments may subject you to reinvestment risk. Here’s how it works: your bond or certificate of deposit pays seven percent, and it matures when market rates are five percent, you won’t be able to match your earlier rate - and your interest checks will be smaller.
You can’t avoid all kinds of risk. But by diversifying across a wide array of investment vehicles, you can lessen your overall risk level and give yourself more chances to succeed.
Contact Wendell at Edward Jones www.edwardjones.com
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