Mutual funds for you

Consider mutual funds — or a similar alternative, exchange-traded funds (ETFS) — for your portfolio. Yes, if you invest in individual stocks, they may double or triple in value in a few years, but investing in stocks successfully can take a lot of time and skill.

A mutual fund pools its shareholders’ money and spreads it across many securities, such as stocks and bonds. Risk is reduced because if any holding crashes, its effect is offset by that of other holdings. An actively managed fund is run by professionals who study and choose holdings, while a passively managed index fund simply tracks a certain index and holds most or all of the same securities, in the same or similar proportions.

Over long periods, the stock market has averaged an annual return of close to 10%. That’s enough to increase your money nearly 1,000% over 25 years. With a simple index fund that tracks a broad-market index, you can earn close to the stock market’s return — and here’s a surprise: You’ll beat the majority of managed stock funds that way, too. Managed funds charge fees that eat into their shareholders’ net gain, and they frequently charge more than 1% per year. Some index funds, in contrast, charge 0.1% or less.

You don’t need lots of money to start investing in mutual funds, either. Some funds do require large initial investments — say, $3,000 or even $10,000. But others require $500 or less. There are often no minimums when you invest in funds via an individual retirement account (IRA). And with ETFS, which trade like stocks, you can buy as little as a single share, for $300 or less — though the commission on such a small trade might make it not worthwhile.

Good index funds to consider are the SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI) and Vanguard Total World Stock ETF (VT). Respectively, they can distribute your assets across 80% of the U.S. market, the entire U.S. market or much of the world’s stock market.