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5 Advantages of Using Mutual Funds to Invest for Your Goals

Mutual funds offer massive benefits that can help you build wealth and fund your future

March 22, 2018 • 3 minute read
BrightPlan Blog

I’ve always been a fan of simplicity. One of my goals in founding Plancorp in 1983 was to simplify financial decisions for our clients.

Fast forward to today, when clients are faced with more investment options than ever before (and the aggressive marketing to go with them). It’s tough to know which ones match up best with your financial goals.

Should you invest in individual stocks? Rental real estate? ETFs? Mutual funds? Or the speculative investment du jour, Bitcoin?

For more than 30 years, we’ve leveraged extensive research to help families and institutions find the best solutions for their goals. Our analysis has shown that mutual funds are the best investment vehicle for people looking to grow wealth for medium and long-term financial goals. Here are 5 reasons why:

1. Reduce Risk in a Click

When you invest in one stock at a time, your risk is concentrated. In theory, you could spread your risk by buying a minimum of 30 individual stocks in 30 separate transactions. But why spend your time, money, and energy researching them when you could diversify your holdings in a single click?

Enter the mutual fund. Mutual funds enable you to own a piece of many companies in many different of industries. The diversification a mutual fund offers can lower your risk and increase your opportunity for growth.

Just take a look at a few of the funds we include in BrightPlan Investment Accounts below. Talk about diversified!

fund holding

 

2. Base Your Portfolio on Academic Research

Maybe you enjoy looking at houses, but that doesn’t mean you’d buy one without consulting your real estate agent. You’d want to be confident that all relevant considerations— the current state of the housing market, insurance rates, tax implications, etc.—had already been researched and addressed.

The same applies to your investment portfolio. Because research has proven that tactical asset allocation and market timing are inefficient investment strategies, we instead take an evidence-based approach that underscores the importance of discipline and risk control in achieving long-term returns.

Using this research, we tailor an investment plan for each one of your goals, deftly managing taxes and trading fees along the way.

3. Cut Investment Costs

You can’t afford to ignore investment costs when funding your goals. DIY investing requires a transaction fee every time you buy or sell a stock and this can really eat away at your wealth.

Let’s say you plan to invest $500 per month in five different stocks. Each trade at your discount brokerage costs $5. Each month you’ll be spending $25 just to get into your positions. That’s like a 5% fee just to get started!

Many mutual funds, on the other hand, have low commissions and low annual management fees (expense ratios). Based on Morningstar data, the average mutual fund cost in 2017 was 0.57%, but you should be able to build a diversified portfolio with mutual funds for less than 0.25% per year in costs.

A BrightPlan Investment Account is a very cost-effective way to invest for your goals. We negotiated a straightforward 0.08% fee with TD Ameritrade that covers all the trading, rebalancing, and dividend reinvestments for accounts. That's just 62 cents per month for a $10,000 account, even if you're making monthly deposits into 5 or 6 mutual funds.

As for the expense ratios, the overall cost for BrightPlan portfolios is much lower than industry averages, ranging between 0.13% and 0.26% per year.

4. Put Your Cash to Work

Individual stocks and ETFs only allow you to buy one share at a time. If you want to invest $100 for a stock that costs $85 dollars a share, that leaves $15 sitting on the sidelines with no chance to grow.

Or let’s say you want to buy one share of Amazon stock (more than $1,500 per share as of this writing), but you can only invest $1,000. In a traditional transaction, you can’t buy less than one share. But you could invest in a mutual fund that holds Amazon stock.

Mutual funds enable fractional-share investing, meaning every penny gets invested. And in portfolio with a low minimum, such as BrightPlan, you can get started with as little as $500.

5. Take the Long View

Unless you have ice in your veins, you’ve likely found yourself getting emotionally tied to individual stocks, constantly tracking their movements. Mutual funds can help you take the better approach of long-term investing.

That’s because mutual fund prices are only set once per day after the market closes. Compared with the constant price swings in stocks and ETFs, watching a mutual fund all day is boring. Nothing happens. Investing in mutual funds feels less like a video game with constant feedback, and more like tending a garden for gradual growth.

This structure can help you take a longer view, giving more time to “invest” in the areas of life where extra attention can add value: your career, your relationships, and your hobbies.

So, in a universe of investment vehicles, how do you select what stars (or constellations, in the case of mutual funds) are right for you? Fortunately, BrightPlan has already done the star-gazing for you.

 

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