Mutual Funds were designed for investors who do not have the time to research and monitor their own stocks. Mutual Funds were also designed to allow investors pool capital, thereby owning a basket of stocks without paying myriad commission fees. They were also created as a means of mitigating risk: mutual funds were designed to be a vehicle in which the 'average retail investor' could mitigate risk through diversification.
But what does diversification really mean? Does it mean risk reduction? Perhaps it does when comparing the risk of holding a single stock relative to holding many stocks. But diversification fails to protect investors when all stocks drop. To achieve total protection, an investor must consider another means of mitigating risk. One such approach is to hedge stocks with options. But mutual funds are restricted from hedging risk through protective options strategies.
In fact, mutual funds are obliged to commit capital to the stock market at all times in many cases. Some Mutual Funds must be in the market 80%, 90% or even 100% of the time! Is this smart or incredibly foolish? Would you really want all your money in the stock market if it is selling off? Or would you prefer to have some capital in cash during the decline.
And not only are mutual funds fraught with the aforementioned dangers but mutual fund managers claim percentage fees, sometimes for simply replicating the performance of the stock market! If that was the limit of your goals you could simply purchase an index exchange-traded fund and it would do better (because you wouldn't be paying the same fees)!
So how can an average investor avoid the pitfalls of a declining stock market? To answer that it is first necessary to accept the failures of mutual funds and trust that a better way exists: to know that you will take care of your money better than anyone else. For investors who are able to move their money out of a Mutual Fund and into a self directed account, the power is truly in investor's hands.
With control comes power to protect capital. You wouldn't own a home or an automobile without purchasing insurance so why tie up capital in the stock market without insuring it. Why risk the hard-earned capital of a lifetime in a mutual fund when you can protect it to a much greater extent through the purchase of a put option.
Owning a stock in conjunction with a put option is known as a married put strategy and has limited risk. This is in sharp contrast to a mutual fund where theoretically it is possible to lose all the capital invested! We cover in detail not just the married put strategy but the adjustments to the strategy so that even if stocks drop substantially against expectations it may still be possible to profit. Would such a thing be possible with a mutual fund? No way! So don't risk your capital unnecessarily. Master the knowledge that will take your trading to the next level and protect your assets.