Mutual Funds/Mutual Fund Investing

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Question
QUESTION: Hello:

Do mutual funds that are comprised of stocks perform better that those that consist of other mutual funds?

I thank you for your reply.

ANSWER: Dear Kenneth:

Mutual funds composed of individual stocks will, in most cases, perform better than funds consisting of other mutual funds. The second type of fund will likely be more diversified, inasmuch it holds more stocks as well as different types of stocks. It should, on the other hand, be more conservative than a fund composed of individual stocks.
By the same token, a fund composed of individual stocks is likely to perform WORSE than a fund consisting of other muitual funds--because it will be more risky.
I myself own both types of funds. I own Vanguard Dividend (individual stocks) and Fidelity 20 (owns different Fidelity funds).
I hope this helps.

Warren


---------- FOLLOW-UP ----------

QUESTION: Hello

I want to thank you for your reply.  I am confused by what you have indicated.

For example, you have "Mutual funds composed of individual stocks will, in most cases, perform better than funds consisting of other mutual funds."

Then you indicate the following: "By the same token, a fund composed of individual stocks is likely to perform WORSE than a fund consisting of other muitual funds--because it will be more risky."

In other words, you have indicated that a mutual fund composed of individual stocks will perform better than and then worse than... I think you need to clarify which is better and which is worse?

I thank you for your clarification.

Answer
Hi Kenneth--

The fewer stocks you own, the more volatile your portfolio will probably be. The more it might go up or go down. As the saying goes, there's safety in numbers.

If you want to play it safe, have a diversified portfolio. A fund consisting of other funds will have more stocks than a fund composed of individual stocks--so it should be more conservative. Going down less, going up less.

In short, to be aggressive, have a less diversified portfolio.

And in case I haven't told you, the Vanguard Group in Malverne, Pa., is a fund family to always consider

Good luck!


Warren

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Warren Boroson

Expertise

Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.

Experience

Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.

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