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Financial diversification provides for asset growth


One of the first dilemmas many people face when they become investors is whether to concentrate on individual securities or mutual funds. Stocks and bonds are more advantageous to some, just as mutual funds are a more appealing to others.

Letís start with mutual funds.

Mutual funds offer diversification. Thatís beneficial because you may find it tough to put together a portfolio with stocks that span several market sectors. In addition, a more limited collection of individual securities may not be sufficient to cushion the effect when one or two of your holdings perform poorly.

Professionals manage mutual funds for shareholders.

Few nonprofessionals are capable of analyzing stocks and market conditions like mutual fund managers and their staffs.

Liquidity is another advantage of funds. Investors can quickly obtain the cash they need by redeeming fund shares at their then-current net asset value. An investor can sell individual stocks, too, but theyíre subject to industry settlement rules. A sale of a portion of a mutual fund investment wonít necessarily alter the diversification of the investorís portfolio.

Letís talk about stocks and bonds.

Choosing your own individual investments allow you to retain control. Itís relatively easy to keep track of your stock and bond holdings, including how much you own and how each investment is performing.

With mutual funds, which may own shares in a large number of companies, you can follow how the fund itself is doing, but likely wonít be able to keep track of the full collection of securities in that fund.

A good tip in buying stocks is that itís not generally a good idea to put more than 10 percent of your money into a single companyís stock or more than 20 percent into companies in the same industry. By following those guidelines, if a company or industry tanks (like the ďdot.comsĒ of the 1990s), you keep losses to a minimum.

Taxes are another consideration. When a mutual fund sells stocks or bonds at a gain, you pay the capital gains tax. Because mutual funds distribute dividends and capital gains at year-end, purchasing shares late in the year means that you may receive a portion of your investment back fairly quickly as a taxable distribution.

The benefits of diversification are important. But a mutual fund that owns shares in a highly successful company wonít have the impact on your investment return that owning the shares individually will. Performance of a particular stock is diluted by the overall performance of all the shares. Of course, knowing what stock is likely to bring huge rewards is another matter.

Whether you choose individual securities or mutual funds, professional advice can prove invaluable. We would be glad to help you define your investment goals and create your personalized strategy to meet those goals.



Jeff Francis is senior vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other finance issues, please call 865-971-2321 or visit First Tennessee financial center.

 

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