Why Mutual Funds Make Sense in a Volatile Market

Violent swings may be here to stay, which makes investing in individual stocks risky.

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[See 20 Funds That Have Weathered Downturns.]

It's also difficult to differentiate between all of the different funds offered. There are thousands available and information provided by firms can at times be misleading. For instance, the Securities and Exchange Commission requires a firm operating a long-term growth fund to invest 80 percent of money into long-term growth instruments. What the firm does with the remaining 20 percent is up to them.

Mutual funds aren't the ideal instrument for all investors, either. They do spread risk, which is good when the market is down. But when the market is up, the allocation of money into a number of different holdings could lessen overall return on investment. In a bull market, investing in individual stocks provides the highest rate of return.

Even with these drawbacks, mutual funds provide peace of mind at a time when peace is hard to come by. Someday the economy will improve and the stock market will be less volatile. Until then, mutual funds provide a bit of tranquility amidst the chaos of an uncertain economy.