As an individual investor, you can build a portfolio of stocks and bonds, but to do so properly requires time and effort. For most people, it makes more sense to invest in mutual funds. But what is a mutual fund? Michael Fischer explains:
What is a mutual fund? (3:44)
A mutual fund allows individual investors like you and me to pool our money in order to achieve investment goals that would otherwise be out of our reach. When thousands of people combine their buying power, they're able to buy a wider range of stocks (and other assets), achieving levels of diversification that otherwise would be impossible. This sort of co-operation also allows the shareholders to “hire” a professional to manage the money. (This may or may not be a good thing — we're often told that “80% of professional money managers fail to beat the market”.)
Where did mutual funds come from? According to this Investopedia article, their origins are sketchy. Some people cite King William I of the Netherlands, who in 1822 created an investment company resembling a modern-day mutual fund. From that point, the concept of pooled investments spread to Switzerland, Scotland, Great Britain, and France. Similar companies bean to appear in the U.S. at the end of the nineteenth century, but the first actual mutual fund was the Massachusetts Investors' Trust, founded in 1924.
Index funds, which Michael will discuss tomorrow, were created in 1971, and popularized by John Bogle, the founder of The Vanguard Group.
CNN Money has an entire section devoted to mutual funds. Business Week offers a free on-line mutual fund scorecard. Yahoo! Finance offers a variety of mutual-fund tools to help you find one that is right for you.