From Volume 85, Number 3 (March 2012)
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It is easier to invest in the stock market now than it has ever been. With the proliferation of the Internet, online investing websites have nearly obliterated the need for stockbrokers and have given individuals the ability to invest in whatever they choose — for around seven dollars per trade, a person can own a share of almost any publicly traded company. While this is certainly a step forward for the world of investing, it does not come without risk. Relying solely on personal research and investing knowledge can lead to an undiversified portfolio and a lot of uncompensated risk. Investors learned this the hard way when the market began to fall in 2007. As a result, many young investors have become shell-shocked and wary of investing in the stock market. According to the Investment Company Institute, in 2005, 48 percent of people under age thirty-five said they were “willing to take substantial or above-average risks in their portfolios”–that number at the start of 2011 had fallen to 34 percent.
It is not necessary, however, to rely solely on one’s own investing prowess when trying to navigate the stock market. Trained professionals offer their services in many forms–almost always for a price. Mutual funds represent one of the most significant ways in which trained professionals are involved with the investment decisions of others. “A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual investors holding shares in the fund.” In 2009, 43 percent of all households in the United States owned mutual funds, with an estimated total of 51,200,000 households invested in mutual funds. The total amount of assets in mutual funds in 2009 was over eleven trillion dollars. Clearly, many people rely on the abilities of mutual fund managers to guide their investment decisions. By purchasing shares in mutual funds, people can own shares of portfolios that are as diversified as they desire without having to pick investments on their own.
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