How to Diversify Your Dividends with Mutual Funds
One of the biggest challenges to creating a diverse portfolio is coming up with enough money to purchase a wide variety of stocks. In addition, paying sales commissions on all those transactions, tracking so many different stocks, and handling the bookkeeping related to them can cost additional time and money and make your head spin.
The solution? Mutual funds, which offer instant diversification — and you may even save commission.
Investment companies have become the main savings vehicle for most Americans because they provide a quick and easy way to build and maintain a diversified portfolio with a minimal investment.
Suppose you have only $2,000 to invest. One option is to purchase 80 shares of a small pharmaceutical company at 25 bucks a pop. Unfortunately, this option leaves you with a very concentrated portfolio. If the company’s blockbuster drug fails to earn FDA approval, you stand to lose a good chunk of your investment. Another option is to purchase 10 shares of 20 different companies for $10 apiece. This strategy gives you some diversity, but the transaction fees take a bite out of that $2,000. A third option is to purchase $2,000 worth of shares in a mutual fund with 500 different stocks in its portfolio. Option three gives you a far more diversified portfolio than the other two options, without the added cost of commissions (though you likely pay management fees). Even with a management fee, this route is still usually less than paying commissions.