Learn about owning shares vs Mutual funds
Should you own stocks, mutual funds, or stick with baseball cards? There are some who would make the case that a portfolio of carefully selected baseball cards held for the long term has proven a better investment than either stocks or mutual funds. However, I wouldn’t bet my retirement on what’s in a shoebox in your attic.
For many investors, it is not a question of either individual stocks or mutual funds.
They use both to meet different financial goals. You’ll need to find your comfort zone and make your own decisions. Here are some properties of both mutual funds and individual stocks to help you decide.
Mutual funds offer at least four characteristics that many investors find attractive:
Mutual funds employ professional managers to oversee the operations. These professionals typically have many years of experience in the business of selecting and evaluating investments for the fund. They make the entire buy and sell decisions, relieving you of that responsibility.
Many mutual funds are highly diversified in their investments, meaning they own a number of stocks so that if one or a few turn out to be bad decisions they won’t dramatically affect the whole fund. They may also invest in a number of different industries and different sized companies, depending on the fund.
It is difficult for individual investors to diversify to this extent.
There are literally thousands of mutual funds to choose from on the market. You can find funds that cover the whole market or funds that are very narrow in their focus and everything in between. Some funds focus on particular industries, while others may look at foreign markets.
Mutual funds are very convenient. They do most of the record keeping for you and provide you with the forms needed to file your taxes. In addition, many offer services such as check writing against a money market fund and other bells and whistles.
For more information, visit About’s Mutual Fund site.
Individual stocks also have some characteristics that investors find attractive:
Greater Upside Potential
Once you’ve paid your brokerage fee, there are no ongoing fees with owning individual stocks like there are with mutual funds. These fees, which may seem small (or large in some cases), drain mutual fund returns. When we look at compounding, you’ll see that even a small percentage change over a long period can make a big difference in your return.
Individual stocks have a greater upside potential than most mutual funds. The diversification that is supposed to keep mutual funds from falling too far also holds them down. You trade some risk for a greater potential reward.
Many investors like to know where their money is going and that can be difficult with a mutual fund that invests in a 100 company. Investing in individual stocks gives you the opportunity to get to know the company and feel comfortable with where your money is going.
Room for Both
Mutual funds are great vehicles for funding retirement plans and you’ll find them in your 401(k) or other retirement plans at work. They also work for the investor that simply doesn’t have the time or energy to consider individual stocks.