Investments: Analysis and Management, 12th Edition

chapter 3

Indirect Investing

As you consider your investing alternatives, given your inheritance, you decide to seriously consider mutual funds and ETFs as a significant part of your strategy. Why? Like many people, you hear a lot about them because they are so widely owned by individual investors. Furthermore, the financial press is continually touting how well one or more funds did last quarter or last year. Some of your family or friends own mutual funds and/or ETFs and have been pleased with them. Moreover, you understand that investing in funds will relieve you of the day-to-day investment decision making that you would otherwise be faced with. So, what's the catch? If mutual funds and ETFs have all these pluses, why don't most people opt for them and minimize or even forego direct investing altogether? It's a good question, and one you decide you need an answer to.

Like many others, you have been hearing a lot lately about ETFs (Exchange Traded Funds), and you feel that you need to learn about them. They are currently viewed as an increasingly popular alternative to mutual funds, and you do not want to be left out. Finally, in order to impress your friends with your knowledge, you want to know at least a little about hedge funds, which are frequently in the news these days.

As we will see, you can make a strong case for using index (passive) mutual funds and/or ETFs as your complete portfolio, saving the cost of a financial advisor as well as the cost of actively managed ...