The theme this week on the One Minute Retirement Tip podcast is could you pass this basic financial literacy quiz? 

Today’s financial literacy quiz question is: Buying a single company's stock usually provides a safer return than a stock mutual fund. 

True or False? 

The answer is false. A stock mutual fund is much more diversified than a single company’s stock, so the mutual fund is going to provide the safer return, since it’s not tied to the fate of a single company or stock.

When you buy a stock, you buy a % of ownership in that business. Now that ownership % may be incredibly tiny, especially when you own shares of stock in Google or Apple or Wal Mart, but your shares of stock represent ownership in that business. 

As a result, your results when you just buy a single company’s stock are completely tied to the fate of that business. Now if you hit a home run and that company’s stock grows by 1000%, you’ll be pleased with yourself that you bought that stock. But any investor worth their salt knows that companies and businesses fail. Industries change. Management changes. Times change. In fact it’s likely that the dominant stocks today won’t be the same dominant stocks 20 years from now. Go back across any decade over the last 50 years...it’s a new batch of companies at the top each time, and plenty of the most loved stocks of 30, 40, 50 years ago have been run into the ground, with their stock price falling from grace right along with the business. 

So the safer and more prudent choice is to diversify, and that’s why investments like mutual funds and exchange traded funds (aka ETFs) are such a great option. 

You can think of a mutual fund or an ETF as a bucket that holds anywhere from about 50 companies to 1000+ companies. By purchasing shares of the mutual fund or ETF, you indirectly own a tiny percentage in all of those stocks that are owned by the mutual fund. Instant diversification for as little as $50 or $100 to get started and spread that money across different companies and industries, all in one mutual fund.

That’s it for today, Thanks for listening! 

My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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