For most investors, individual stocks have proven just too volatile, though you might not know it from the gains of the past five years. Buying individual stocks has become overly expensive, except for the largest investors, and even they seem to prefer funds these days. Funds have become the investment vehicle of choice for Americans because of their convenience, performance, liquidity, and low cost. Load funds, or those sold with a sales charge, awakened people to the idea of mutual funds, but the fund broker's interest was not aligned with the client's. Once their investments were freed of fees, loads and charges, which in the past had eaten up anywhere from three to ten percent of capital, mutual funds began to really get noticed.
Mutual funds benefit from tremendous economies of scale by pooling assets.
While the small investor buying a couple hundred shares of IBM will pay a couple of percentage points in commissions to their broker, mutual funds pay only a fraction of a percent because of the massive orders they place. As funds get larger, their costs continue to shrink. Like in the software and computer industries, the big are getting bigger. By pooling people's money and saving on commission costs, mutual funds have become the investment vehicle of choice for the individual investor. Here's another short word about individual stocks.