Mutual funds to diversify portfolios
Asset allocation accounts for the bulk of the long-term performance of investment portfolios. For the same reason you don’t put all your eggs in the same basket, successful investors rely on an array of investments. As Marc Amateis explains in a Money Talk Video, mutual funds can help make it easier to diversify a portfolio. Here is a transcript of the video:
When you set up an investment portfolio you really want to achieve a wide diversification: U.S. stocks, overseas stocks, large-caps, mid-caps, small-cap stocks, value stocks, growth stocks. The use of mutual funds allows you to get wide diversification across the broad spectrum of equities without having to pick and choose lots of individual stocks.
When you invest in a mutual fund, you’re getting the expertise of that fund management team. And the best fund companies will do an outstanding job of researching the individual firms that they’re going to invest in, and we can take advantage of that.
There are about 63,000 listed securities globally, about 15,000 in the US alone.
It would be impossible for us to go out and research every individual company on our own to the extent that a mutual fund management team can do on a daily basis.
An introduction to mutual funds, by the Financial Industry Regulatory Authority
There have been a number of quality academic studies that have shown that basically 92 percent of the variance of the performance of investment portfolios is due to asset allocation. So that’s a real compelling argument for proper diversification and for really concentrating on asset allocation in a portfolio.
A very small part of the success that one has as an investor is due to individual security selection. Most of the success comes from a properly constructed portfolio and asset allocation.
For most investors, it’s very difficult to get proper diversification through individual stock and bond selection. It’s a lot easier to get proper diversification through the use of mutual funds and exchange-traded funds to get the kind of diversification that you need to control risk in a portfolio.
Marc Amateis is a vice president and investment advisor at Landaas & Company.
Money Talk Video by Peter May
(initially posted May 14, 2013)
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