Are mutual funds safe from defaults?
The only way for a mutual fund to default is if it inflated the NAV. I.e.: it reports that its investments worth more than they really are. Then, in case of a run on the fund, it may end up defaulting since it won't have the money to redeem shares at the NAV it published. When does it happen? When the fund is mismanaged or is a scam. This happened, for example, to the fund Madoff was managing. This is generally a sign of a Ponzi scheme or embezzlement. How can you ensure the funds you invest in are not affected by this? You'll have to read the fund reports, check the independent auditors' reports and check for clues. Generally, this is the job of the SEC - that's what they do as regulators. But for smaller funds, and private (i.e.: not public) investment companies, SEC may not be posing too much regulations. There are very strict regulations that requires the assets which a fund buys on behalf of its investors to be kept completely separate from the fund's own assets (which it uses to pay its expenses), except for the published fees. Funds are typically audited regularly to ensure this is the case. So the only way in which a default of the fund could cause a loss of invstor money would be if the fund managers broke the regulations and committed various crimes. I've never heard of this actually happening to a normal mutual fund. There is of course also a default risk when a fund buys bonds or other non-equity securities, and this may sometimes be non-obvious. For example, some ETFs which are nominally based on a stock index don't actually buy stocks; instead they buy or sell options on those stocks, which involves a counterparty risk. The ETF may or may not have rules that limit the exposure to any one counterparty. There is a measure of protection for investors. It is not the level of protection provided by FDIC or NCUA but it does exist: Securities Investor Protection Corporation What SIPC Protects SIPC protects against the loss of cash and securities – such as stocks   and bonds – held by a customer at a financially-troubled SIPC-member   brokerage firm. The limit of SIPC protection is $500,000, which   includes a $250,000 limit for cash. Most customers of failed brokerage   firms when assets are missing from customer accounts are protected.   There is no requirement that a customer reside in or be a citizen of   the United States. A non-U.S. citizen with an account at a brokerage   firm that is a member of SIPC is treated the same as a resident or   citizen of the United States with an account at a brokerage firm that   is a member of SIPC. SIPC protection is limited. SIPC only protects the custody function of   the broker dealer, which means that SIPC works to restore to customers   their securities and cash that are in their accounts when the   brokerage firm liquidation begins. SIPC does not protect against the decline in value of your securities.   SIPC does not protect individuals who are sold worthless stocks and   other securities. SIPC does not protect claims against a broker for   bad investment advice, or for recommending inappropriate investments. It is important to recognize that SIPC protection is not the same as   protection for your cash at a Federal Deposit Insurance Corporation   (FDIC) insured banking institution because SIPC does not protect the   value of any security. Investments in the stock market are subject to fluctuations in market   value. SIPC was not created to protect these risks. That is why SIPC   does not bail out investors when the value of their stocks, bonds and   other investment falls for any reason. Instead, in a liquidation, SIPC   replaces the missing stocks and other securities when it is possible   to do so.
Disclosure - I love Jack Bogle. Jack basically invented the index fund, and as a result, let the common investor have an opportunity to choose a long term return of (S&P-.05%) instead of losing nearly 2% that many funds in that day charged. The use of index investing has saved investors many billions of dollars.  The 1% round trip, total cost to buy/sell, was common. Fees for trading have since dropped. I happen to use Schwab who charges $9 for a trade. On $100,000, this is not .5% ($500) but less than .01%. I think it's safe to say that billion dollar mutual funds are paying even less for trades that I do. I believe Jack's example here is a combination of old data and hyperbole.  The cost is not so much for the trades, per se, but for the people managing the fund. An index fund has a manager of course, but it's pretty much run by a computer. Mutual funds don't do what ETFs do because, according to how the fund was built in their contract, they can't.  That is not how they are built and the people that invested in them expect them to act in a certain way. That is ok, though.  Many people still invest in mutual funds partially because of their history but there are some advantages to mutual funds over etfs.  Mainly mutual funds must mark-to-market at the end of day while etf values can drift from the asset value especially in crisis.  As long enough people invest in mutual funds the funds make enough money on their fees they don't need to change.  Maybe mutual funds will go extinct as etfs do have significant advantages, but it likely won't happen soon. Hopefully this $1000 is just a start, and not the last investment you will ever make. Assuming that, there are a couple of big questions to consider: One: What are you saving for? Are you thinking that this is for retirement 40 or 50 years from now, or something much sooner, like buying a car or a house? You didn't say where you live. In the U.S., if you put money into an IRA or a 401k or some other account that the government classes as a retirement account, you don't pay taxes on the profits from the investment, only on the original principal. If you leave the money invested for a long period of time, the profits can be many times the original investment, so this makes a huge difference.  Like suppose that you pay 15% of your income in state and local taxes.  And suppose you invest your $1000 in something that gives a 7% annual return and leave it there for 40 years. (Of course I'm just making up numbers for an example, but I think these are in a plausible range. And I'm ignoring the difference between regular income tax and capital gains tax, etc etc. It doesn't change the point.) If you put the money in a classic IRA, you pay 0% taxes the year you open the account, so you have your full $1000, figure that compound interest for 40 years, you'll end up with -- crunch crunch crunch the numbers -- $14,974. Then you pay 15% when you take it leaving you with $12,728. (The end result with a Roth IRA is exactly the same. Feel free to crunch those numbers.) But now suppose you invest in a no-retirement account so you have to pay taxes every year. Your original investment is only $850 because you have to pay tax on that, and your effective return is only 5.95% because you have to pay 15% of the 7%. So after 40 years you have -- crunch crunch -- $10,093. Quite a difference. But if you put money in a retirement account and then take it out before you retire, you pay substantial penalties. I think it's 20%. If you plan to take the money out after a year or two,  that would really hurt. Two: How much risk are you willing to take? The reality of investment is that, almost always, the more risk you take, the bigger the potential returns, and vice versa. Investments that are very safe tend to have very low returns. As you're young, if you're saving for retirement, you can probably afford a fairly high amount of risk. If you lose a lot of money this year, odds are you'll get it back over the next few years, or at least be able to put more money into investments to make up for it. If you're 64 and planning to retire next year, you want to take very low-risk investments. In general, investing in government bonds is very safe but has very low returns. Corporate bonds are less safe but offer higher returns. Stocks are a little more. Of course different companies have different levels of risk: new start-ups tend to be very risky, but can give huge returns. Commodities are much higher risk. Buying on margin or selling short are ways to really leverage your money, but you could end up losing more than you invested. Mutual funds are a relatively safe way to invest in stocks and bonds because they spread your risk over many companies. Three: How much effort are you willing to put into managing your investments? How much do you know about the stock market and the commodities market and international finance and so on, and how much are you willing to learn? If your answer is that you know a lot about these things or are willing to dive in and learn a lot, that you can invest in individual stocks, bonds, commodities, etc. If your answer is that you really don't know much about all this, then it makes a lot of sense to just put your money into a mutual fund and let the people who manage the fund do all the work. "An investment portfolio is typically divided into three components: All three of those can be accessed through mutual funds or ETFs. A 401(k) will probably have a small set of mutual funds for you to pick from. Mutual funds may charge you silly expenses if you pick a bad one. Look at the prospectus for the expense ratio. If it's over 1% you're definitely paying too much. If it's over 0.5% you're probably paying too much. If it's less than 0.1% you have a really good deal. US stocks are generally the core holding until you move into retirement (or get close to spending the money on something else if it's not invested for retirement). International stocks are riskier than US stocks, but provide opportunity for diversification and better returns than the US stocks. Bonds, or fixed-income investments, are generally very safe, but have limited opportunities for returns. They tend to do better when stocks are doing poorly. When you've got a while to invest, you should be looking at riskier investments; when you don't, you should be looking for safer investments. A quick (and rough) rule of thumb is that ""your age should match the portion of your portfolio in bonds"". So if you're 50 years old and approaching retirement in 15 years or so, you should have about 50% in bonds. Roughly.  People whose employment and future income is particularly tied to one sector of the market would also do well to avoid investing there, because they already are at risk if it performs badly. For instance, if you work in the technology sector, loading up on tech stocks is extra risky: if there's a big bust, you're not just out of a job, your portfolio is dead as well. More exotic options are available to diversify a portfolio: While many portfolios could benefit from these sorts of holdings, they come with their own advantages and disadvantages and should be researched carefully before taking a significant stake in them." All lenders make money from loans, despite the fact that there will be some defaults, they just have to make enough money from those that don't default to offset the losses from those that do, so that their over all profit is good enough to be justified, so there's no reason the p2p lending companies can't protect your loan. If you remove the risk of losing your investment you can expect your return to be reduced though, as they have to take more profit away from you in order to fund the pool used to pay out when there is a default. This doesn't necessarily mean your money is completely safe though, if the p2p lender itself went bust you would probably still lose your money, unless it was appropriately insured. I'm not sure liquidity is really the right word really, liquidity is about encashment without serious penalty. If you can transfer the debt to someone else at any time then liquidity is good, but if you don't really have that option (as most lenders don't) then your investment amount (whatever isn't paid back yet) is completely illiquid still, just for a shorter time. I don't see how the term is important myself, there are many investments that have differing maturity time scales, and you just have to pick one that has a suitable time scale, return and risk for you. 1% charge or not, there is still an ultimate net return on investment, secondary market or not. Virtually any investment has costs of some sort, you just have to take them into account and make sure you don't get fooled into thinking the ROI is better than it seems because of the way they've packaged and presented it. "I'll tackle number 2. It's one which many academics dismissed as an impossibility; after all, how could that be rational? What could cause negative yields (ie effectively giving an entity cash and paying for the privilege of doing so!) is something we've experiencing currently: fear. Back in the financial crisis, investors were actually paying to store their cash in treasuries, because of the  fear that if they left it with a bank they might not get it back.   What about the FDIC Insurance you may ask quite logically. The problem is that we're talking about massive entities, like pension funds, asset managers, corporations, who normally would store some (think millions - billions) in cash and cash equivalents (bank accounts, money market funds, short-term paper), they really aren't protected. So, they do what turns out to be the rational thing, which is pay a premium on ""safe assets"" ie US Gov't bills to guarantee you get most of your money back.  The same thing is currently happening with German front-end paper, as Europeans pull their money out of banks/periphery assets and search for safety.  Hope that helped." "Generally, yes.  Rather than ask, ""why are these guys so cheap?"", you should be asking why the big names are so expensive. :) Marketing spend plays a big role there. Getting babies to shill for your company during the super bowl requires a heck of a lot of commissions. Due to the difficulties involved in setting up a brokerage, it's unlikely that you'll see a scam. A brokerage might go bankrupt for random reasons, but that's what investor insurance is for. ""Safeness"" is mostly the likelihood that you'll be able to get access to your funds on deposit with the broker. Investment funds are insured by SIPC for up to $500,000, with a lower limit on cash. The specific limits vary by broker, with some offering greater protection paid for on their own dime. Check with the broker -- it's usually on their web pages under ""Security"". Funds in ""cash"" might be swept into an interest-earning investment vehicle for which insurance is different, and that depends on the broker, too. A few Forex brokers went bankrupt last year, although that's a new market with fewer regulatory protections for traders. I heard that one bankruptcy in the space resulted in a 7% loss for traders with accounts there, and that there was a Ponzi-ish scam company as well. Luckily, the more stringent regulation of stock brokerages makes that space much safer for investors. If you want to assess the reliability of an online broker, I suggest the following: It's tempting to look at when the brokerage was founded. Fly-by-night scams, by definition, won't be around very long -- and usually that means under a few months. Any company with a significant online interface will have to have been around long enough to develop that client interface, their backend databases, and the interface with the markets and their clearing house. The two brokerages you mentioned have been around for 7+ years, so that lends strength to the supposition of a strong business model. That said, there could well be a new company that offers services or prices that fit your investment need, and in that case definitely look into their registrations and third-party reviews. Finally, note that the smaller, independent brokerages will probably have stiffer margin rules. If you're playing a complex, novel, and/or high-risk strategy that can't handle the volatility of a market crash, even a short excursion such as the 2010 flash crash, stiff margin rules might have consequences that a novice investor would rather pretend didn't exist." "I'd question whether a guaranteed savings instrument underperforming the stock market really is a risk, or not?  Rather, you reap what you sow. There's a trade-off, and one makes a choice.  If one chooses to invest in a highly conservative, low-risk asset class, then one should expect lower returns from it.  That doesn't necessarily mean the return will be lower — stock markets could tank and a CD could look brilliant in hindsight — but one should expect lower returns.  This is what we learn from the risk-return spectrum and Modern Portfolio Theory. You've mentioned and discounted inflation risk already, and that would've been one I'd mention with respect to guaranteed savings. Yet, one still accepts inflation risk in choosing the 3% CD, because inflation isn't known in advance.  If inflation happened to be 2% after the fact, that just means the risk didn't materialize.  But, inflation could have been, say, 4%. Nevertheless, I'll try and describe the phenomenon of significantly underperforming a portfolio with more higher-risk assets.  I'd suggest one of: Perhaps we can sum those up as: the risk of ""investing illiteracy""? Alternatively, if one were actually fully aware of the risk-reward spectrum and MPT and still chose an excessive amount of low-risk investments (such that one wouldn't be able to attain reasonable investing goals), then I'd probably file the risk under psychological risk, e.g. overly cautious / excessive risk aversion. Yet, the term ""psychological risk"", with respect to investing, encompasses other situations as well (e.g. chasing high returns.) FWIW, the risk of underperformance also came to mind, but I think that's mostly used to describe the risk of choosing, say, an actively-managed fund (or individual stocks) over a passive benchmark index investment more likely to match market returns."