Mutual Fund Theorem

The Dairy Queen Theorem states that you can live a happy and healthy life eating only at Dairy Queen. Breakfast, lunch, dinner...every meal at DQ. It's a central tenet of the Shmoop diet.

We bring this up...mostly because we like thinking about ice cream. But also because the Dairy Queen Theorem provides a similar dictum to the mutual fund theorem.

You are supposed to diversify when you invest. You can't just put your whole fortune in soy futures and hope tofu becomes, um...much more popular. You need to spread your money around...stocks, bonds, precious metals, money in various countries and various currencies. That way, if things go wrong (bad soy harvest, etc.), you don't lose everything.

The mutual fund theorem states that you can achieve this diversification using only mutual funds. You don't have to buy stocks, and then buy some bonds, and then purchase some gold jewelry at a local pawn shop. Instead, you can spread your money around in equity funds and bond funds and gold funds.

You can achieve all the diversity you need through one mode of investment...that's the mutual fund theorem.