4 Reasons to Buy Mutual Funds

Even though I've been buying stocks for 15 years, I've been buying mutual funds for just as long. Stocks and mutual funds? Living together? Mass hysteria!

Actually, it's quite a good combination. See, stocks and funds aren't exactly like cats and dogs under the same roof -- although that, too, can certainly be a harmonious working relationship in many cases.

It's just that, as much as I trust my ability to pick some market-thumping stocks and 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 no mutual fund out there could fit your investing philosophy? If 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 and OakmarkFund. 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, and 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 well-managed companies with wide market opportunities like auto loan specialist AmeriCredit (NYSE: ACF  ) and Liberty Media (NYSE: LBTYA  ) . Those were some of Sanborn's biggest holdings. Wanger had no problem loading up on companies like slot machine manufacturers and cruise line operators.

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 two funds I own at the moment are OakmarkInternational Small Cap Fund and Greenspring Fund. I bought into the former 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. Greenspring specializes in snapping up undervalued stocks and convertible bonds, and it's still open for new money. Some of Greenspring's top holdings include convertible bonds issued by Amazon.com (Nasdaq: AMZN  ) and high-end mattress maker Tempur-Pedic (NYSE: TPX  ) .

Motley Fool Champion Funds singled out a no-load way to play the booming Asian markets last year and 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's 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 percolating in a developing market or even in 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 Zimmerman recommended a few months ago to Champion Funds newsletter subscribers has holdings that include oil drilling specialist Nabors Industries (NYSE: NBR  ) and energy giant ConocoPhillips (NYSE: COP  ) . Now, $200 is barely enough to buy just two shares in both companies, before commissions.

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

4. Diversify, diversify, diversify
You can't believe 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 or she 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've probably seen some seemingly worthy companies wiped out completely. It's only natural.

However, the diversification of mutual funds is also important for 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. I'll be the first to admit that I own way too many companies in the casual dining space. I think I've owned most of the companies at one time or another save for maybe Ruby Tuesday (NYSE: RI  ) , and that's where I may be headed next. Why? Because I feel intimately familiar with the restaurant industry. Just watch. In a few months, I may add a few more 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 gold-mining specialists over the past few years? You bet. But it's that tendency to fall back into the familiar that often leaves investors with portfolios that are riskier 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 base 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 newsletter, 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 by weeding out thousands of suspect funds to find 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.

Longtime Fool contributor Rick Munarriz did have a cat and a dog living together in his home while growing up, and they got along pretty well. Rick does not own stock in any of the companies in this story. Amazon.com is a Stock Advisor recommendation. The Fool has adisclosure policy.


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