What advantage do mutual funds or ETFs commonly provide?

Mutual funds and ETFs (Exchange-Traded Funds) are popular investment vehicles primarily because they offer a diversity of investments that minimizes risk. This is an important advantage as it allows investors to spread their capital across a variety of assets, such as stocks, bonds, or other securities, rather than concentrating their investments in a single security.

The concept of diversification is grounded in the principle that different assets often perform differently under varying economic conditions. By holding a diversified portfolio, the negative performance of one investment can be offset by the positive performance of others, thus reducing overall risk. This approach can lead to more stable returns over time and is particularly beneficial for individual investors who might not have the resources or expertise to build a well-diversified portfolio on their own.

While there are benefits related to taxes, liquidity, and strategies for speculative investments, these aspects are not the primary advantages of mutual funds or ETFs. They are primarily valued for their ability to provide a broad exposure to various markets and sectors, which helps to mitigate risk for investors.