One of the biggest and most substantial goals many people have is saving for retirement. This long term savings strategy lends itself very well to investing in the stock market, since over long periods of time stocks tend to do quite and provide a good return on investment.
Of course, everyone who has seen the daily movements of the stock market knows that stocks can, and do, fall in value all the time. The key, however, is your individual time horizon. The worker who is just a few years from retirement will certainly want to scale back, or even eliminate, the stock market portion of the portfolio. For those workers just entering the labor force, however, their long time horizon can make stock market investing very appropriate.
Investing in the stock market does not mean putting all your money into a single stock, however. This concentration unnecessarily increases the level of risk, and if the stock you choose turns out to be a loser your retirement could be in real jeopardy.
Diversification is extremely important in any kind of investment, but it is particularly vital when investing in the stock market. Different stocks, in different industries, can have quite different levels of performance, so it is best to buy a diversified basket of stocks in order to spread out your risk and increase your chances of a good return.
One savings and investment vehicle designed with diversification in mind is the mutual fund. Mutual funds are a great way for small investors to own a large number of stocks. It would be very difficult indeed for an investor who does not have millions of dollars to put together a diversified portfolio of a couple of hundreds of stocks. Mutual funds work by pooling the smaller funds of many different investors, and using those proceeds to buy a large number of stocks.
This diversification allows investors to achieve a lower level of risk, and often a higher level of performance, than they would otherwise be able to achieve. There are a large number of mutual funds out there, focusing on every conceivable category of investment, from health care stocks to real estate. It is important to choose a fund that matches your needs, and your level of risk. It is also important to check the past performance of the fund to make sure it has met or exceeded the benchmarks for its class, and to be sure that the expenses are kept as low as possible.
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