For many, the idea of investing in "slow and steady" mutual funds makes little if no sense at all. For this special type of investor, the very same reasons why mutual funds exist are actually their arguments against considering them serious investment vehicles. And of the people who are not quite "sold" on the idea of investing in mutual funds, some are not quite sure whether these investments will help them reach their goal of striking it rich.
But mutual funds can make you rich. But not the way people think. Let's take a closer look at how the very concepts that people argue against the case for mutual funds can actually help investors get rich:
1. Diversification. Probably the biggest case people make against investing in funds is that they are far too diversified. Why invest in so many stocks when you can simply pick half a dozen winners and leave the losers alone? Makes sense in theory, however picking the winners is so easily done. In fact, many people will pick just one or two winners, stocks that come with high volatility and have seen a good run up in price. The risk, of course, is that these investments are often over bought, meaning once they correct, they will hurt the investor's portfolio. What makes more sense is holding a basket of stocks, some big winners and some more modest gainers. While it may be a slower and steadier increase, diversification is key to any long-term wealth building strategy.
2. Whole lots and leverage. Along with investing in the two or three winners that speculative investors prefer over a full, diversified portfolio, many of them actually use maximum leverage order to enhance gains. This involves margin or the use of options. With mutual funds, the investor does not rely on leverage or margin. Gains are more natural. However, investors can units rather than whole stocks. This allows for fractional ownership, providing marginally greater gains over the course of years. In addition, investors can start investing with a lot less money and can also invest on a regular basis. If buying whole stocks, investors would have to purchase whole units which becomes a costly proposition even with the cheapest discount brokers.
So what makes the most sense? A couple of highly speculative, high-flying and high-volatility shares that most people cannot purchase without the use of extensive leverage? Or a basket of securities that have been extensively analyzed for their long-term growth and profit potential, the same kind of basket that can be purchased for as little as or 0 every month without having to worry getting hit with a trading fee?
The answer is obvious. You can get rich with mutual funds because you can invest in fractional units on a regular basis (known as Dollar Cost Averaging) and you will minimize your exposure to the higher risk equities that could be the winners one day and the losers the next (known as diversification).
