The two most popular ways to make long term investments for college today are:
- buying individual stocks, or
- buying securities bundled in a package, commonly called mutual funds.
The important decision between directly owning a security or buying a fund is your tolerance for risk. A proven way to reduce your risk is by diversifying investments or by not “putting all your eggs in one basket.”
With mutual funds, you can diversify by:
- holding a variety of investments (shares in companies in a number of different industries, plus Treasuries and municipals, etc.) and by
- reducing the risk with a certain type of security (by investing in municipal bonds issued by a variety of different public entities, for instance).
The goal is the same: If one issue goes sour or a particular kind of security comes under market pressure, the impact on investment holdings will be limited. As a college fund grows, it is likely to develop into a mix of investments, especially as the student approaches college years. The best part of owning a mutual fund (vs. individual stocks) is that it can be switched to different investments within the fund without incurring sales charges.