The trouble with the stock market is the fact that some stocks go down quality stocks, too and it is a devastating experience to pick out so-called “blue chips” such as U.S. Steel, General Motors and Standard Oil of New Jersey only to find after you have held them for a time that they have sagged in price. If they have not sagged they may just have held their own or even increased slightly, but when you, the investor, have sold, the buying commission plus the selling commission plus taxes have resulted in a net loss to you.

You might have been less fortunate than to have picked these “blue chips.” You might have picked stocks in sound companies like American Motors or General Dynamics and found that you lost a substantial part of your money if you bought near the peak.

The chief means of hedging against losses on one stock is diversification. Mutual funds, or investment companies as they are sometimes called, provide essentially two safeguards that justify their existence: diversification and expert selection of stocks. They are companies whose sole function is to get together a group of stocks. The investor, by putting his money in the investment company, buys a small fraction of diverse stock holdings. When one particular stock drops, perhaps disastrously, the effect of the drop on the whole portfolio is negligible, so that the effect on the investor in the fund must also be negligible. Investment - Read More.