Final answer:
For Martin Campbell, who seeks to diversify his investments, an index fund is recommended due to its broad market exposure and reduced risk compared to investing in individual securities. Mutual funds are managed by professionals and pool money from investors to purchase a diversified portfolio. An index fund mimics the overall market performance, which provides more stable returns than individual stocks.
Step-by-step explanation:
Martin Campbell, who is concerned with diversification, should consider various types of mutual funds for his investment. A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities, which is managed by financial professionals. For someone who wants to make sure their investment is diversified, an index fund would be recommended. Index funds seek to mimic the market's overall performance by holding a representation of the full market or specific segments, offering diverse exposure to a wide array of securities, hence reducing the risk that comes from investing in individual stocks.
To understand why diversification matters, remember that it helps in reducing the risk by spreading investments across various financial instruments, industries, and other categories. It can protect against the poor performance of a single investment. By investing in an index fund, Martin would own a tiny share of every firm in the stock market—or a segment of it—making the fund's value fluctuate with the stock market's average, which is generally more stable than individual stocks.
While growth, balanced, and money market funds offer different benefits, an index fund best meets the need for diversified investment options for wary investors like Martin Campbell.