Originally published on: MoneyGeek
You shouldn’t own a small number of stocks and bonds, because you’re not diversified enough. However, you shouldn’t buy hundreds of them either, not just because it’s tedious to buy every single thing, but also because you’d pay far too much in transaction costs. For example, if you had just $5,000 saved up, you shouldn’t divide it up into five hundred pieces worth $10 each. If you made 500 transactions, you would pay $2500 even if transaction costs were just $5/trade.
Many people shared the same concern, so they came up with an idea. What if they pooled money together and bought a lot of stocks and bonds? Someone will manage this pool of money, and investors will each own a piece of this pool. That’s how mutual funds got started.
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