No one can see the future—and luckily, you don't have to
We've all heard stories about the great-grandfather who bought a share of Coca-Cola stock in the 1920s—and who's now a multimillionaire. But what about everyone else?
The problem with identifying a single investment that's going to make a ton of money over the next few decades is that no one has a crystal ball.
Sure, now co*ke looks like a smart investment. But back then, this legendary investor put the equivalent of several hundred dollars into something that was far from a sure thing.
If you can't find the needle, buy the haystack
There's always a risk of losing money when you invest. The good news is that you can avoid one type of risk—the risk of investing everything in a company that goes under—by buying hundreds or thousands of securities at a time.
This is what's called "diversification." It works best when you buy into multiple industries and include companies of all different sizes because this variety helps even out the ups and downs.
"Sounds great," you might think, "but where am I going to get the money for thousands of investments—and the time to find them?"
Luckily, that's exactly what mutual funds and ETFs (exchange-traded funds) are for. They find and invest in a diversified portfolio of individual stocks or bonds, and you, in turn, buy shares of the fund.
Find out more about the benefits of buying mutual funds or ETFs
