Money Advice: What the heck is a mutual fund anyway?

What is a mutual fund?

Have you ever wondered what the heck a mutual fund is?  John Loyd with 'The Wealth Planner' grabbed a stack of pencils for a easy, visual way to help you understand what it is.

"Let's pretend this pencil is an individual stock," said Loyd.  

Go ahead, picture the pencil as the single stock.

"Here’s the issue, it will break very, very easily.  So the company, it may have a lawsuit, it may have a recall, it may have a down quarter - you may wake up tomorrow and see that your stock has dropped 20 or 30 percent and that can and does happen.”

Now, picture a bundle of pencils surrounding the single original pencil.  That bundle represents stocks from different industries.

“If we take this same stock and we bundled it together and go with some other stocks covering different industries - If I try to break this, it’s virtually impossible, you can’t do it.”

And that's the benefit of a mutual fund.

"You have diversification and basically there’s strength in numbers," said Loyd.

Pretty simple concept, right?

Learn more about John Loyd, 'The Wealth Planner'.

Each week WFAA brings you Frontier Financials, 'Snackable Money Advice' from North Texas financial and real estate experts - Powered by Frontier Business Edge.

Copyright 2016 WFAA


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