4 Reasons to Buy Mutual Funds

Even though I've been buying stocks for 15 years, I have been buying mutual funds for just as long. Stocks? Mutual funds? Living together? Definitely. See, stocks and funds aren't exactly like cats and dogs under the same roof -- though that's certainly a harmonious working relationship in many cases.

It's just that, as much as I trust in my ability to pick some market-thumping stocks and as much as I relish the investing lessons that I can muster when I really blow it from time to time, I just can't wean myself off owning the occasional fund or two.

It's as simple as that. With as many mutual funds to choose from as there are stocks on the trading exchanges, do you really think that there isn't a mutual fund out there that could fit into your investing philosophy? If you don't think so, I have four reasons that may change your mind.

1. Sharp insight from sharp minds
Through a good chunk of the 1990s, I owned shares in Acorn International (LAIAX) and OakmarkFund (OAKMX). I was a big fan of Oakmark's Robert Sanborn and Acorn's legendary Ralph Wanger. I would look forward to their quarterly updates like some giddy kid breathing against the glass at a candy store. Their market insight was usually on the money. Most important, I welcomed the opportunity to learn more about what these savvy money managers were buying and selling. Wanger and Sanborn introduced me to great stocks, teaching me how to appreciate companies like Shuffle Master or Eli Lilly, respectively.

These days, you don't need to wait by the mail for your quarterly updates. Many fund families broadcast them online. And even though you don't need to be a shareowner in any particular fund to read through the latest reports, nothing beats the daily interaction of owning a particular equity fund.

2. Treading where your feet never touch the ground
The only fund I own at the moment is OakmarkInternational Small Cap Fund (OAKEX). I bought in shortly after its inception and have been rewarded nicely over the years. No, you can't follow me there. The fund has been closed to new investors for a few years now. However, there are plenty of other quality funds out there that specialize in buying promising overseas companies just as they are starting to make their leaps into relevancy.

Motley Fool Champion Funds analyst Shannon Zimmerman singled out a no-load way to play the booming Asian markets last year, when he picked a pair of proven international funds in 2004. I have owned foreign stocks from time to time. Odds are, at any point in time, there is a market -- out there, somewhere -- trouncing the domestic averages. However, I don't have the time or the connections to know every particular nuance of every particular company that is percolating in a developing market or even a growing developed nation. Mutual funds offer a great way to get in on the overseas action without ever having to stamp your passport.

3. Pocket change adds up
If you had $200 to throw at the market right now, spending it all on one particular stock would be pointless. Trading commissions would put you in a 3% to 10% hole right away. However, a mutual fund that Shannon recommended a few months ago to Champion Funds subscribers has top holdings that include energy giant Anadarko Petroleum (NYSE: APC  ) and credit card specialist Capital One Financial (NYSE: COF  ) . Now, $200 is barely enough to buy just two shares in either company, before commissions.

This particular fund allows you to buy into all of these companies, without skimming a commission off the top, for just $200, so long as you agree to have at least $50 automatically invested every month thereafter.

4. Diversify, diversify, diversify
You can't believe that I waited this long to mention the best reason to stock a few mutual funds into your portfolio, can you? A mutual fund investment creates a vested interest in a pocket of stocks. Instantly. As much as I love picking stocks, even low-priced stocks, if someone tells me that he has a few hundred bucks to invest in the market, I just wouldn't feel right singling out any particular stock. That's because diversification is important. If you've been in the market long enough, you have probably seen some seemingly worthy companies wiped out completely. It's only natural.

However, the diversification of mutual funds is also important for the investors with a significant portfolio and a lot more money camping out on the sidelines. That's because, if you're like me, your stocks tend to gravitate toward certain areas where you feel comfortable. Why do I own shares in both Netflix (Nasdaq: NFLX  ) and Cedar Fair (NYSE: FUN  ) ? Because I feel intimately familiar with the leisure industry. Just watch. In a few months, I may wind up adding Six Flags (NYSE: PKS  ) to my portfolio, too. Would that make my portfolio too concentrated in one particular sector? Perhaps. Have I missed out by not owning energy stocks or real estate developers over the past few years? You bet. But it's that tendency to fall back into the familiar that often leaves investors with riskier portfolios than they realize. Buying into a proven fund, even if it's a sector fund in an industry that you know little about, can help spread out your market risk.

The feeling is mutual
Have I convinced even the staunchest stock purist in the lot? Probably not. However, if you do touch bases with me in another 15 years, odds are that I will have even more mutual funds in my portfolio to talk about. It just makes too much sense.

That's why you owe it to yourself to check out Shannon's Champion Funds service -- or at the very least try a 30-day free trial on for size. Even if our equity research products seem to be more up your alley, look deep into your portfolio and I'm sure you will find a hole or two just waiting to be filled with the right fund. Shannon can help you out by weeding out thousands of crappy funds to single out the top potential performers.

The same commitment to ferreting out winning stocks applied to a mutual fund investing philosophy? Sweet.

This article was originally published on Oct. 26, 2005. It has been updated.

Rick Munarriz did have a cat and a dog living in his home while growing up. They got along pretty well. He owns shares in Netflix and Cedar Fair. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Netflix and Shuffle Master are Stock Advisor recommendations. Cedar Fair and Eli Lilly are Income Investor recommendations.


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