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from Part I - Institutionalization and Investor Protection
Published online by Cambridge University Press: 20 October 2022
The rise of mutual funds has been a defining trend in finance. Unlike many financial innovations, they have greatly improved the financial well-being of retail investors, many of whom invest in mutual funds to save for retirement.2 Over the last forty years, the bulk of retail investors have shifted from owning stocks directly in companies to holding them through these financial intermediaries.3 This is a foremost example of economic theory impacting behavior and bettering peoples’ lives. Finance theory teaches the value of a diversified portfolio. Mutual funds offer diversification otherwise unobtainable to typical investors. Finance theory also teaches that investors, on average, cannot earn returns in excess of the market.4 Through passively managed funds (i.e., index funds), investors can own a portfolio that simply tracks an index of securities. This frees them from fruitless stock-picking and the unnecessary fees finance professionals charge for it.5
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