The mutual funds vs stocks debate is something which every experienced investor has contemplated at depth at some point in time. The simple answer is that there is no answer, in the objective sense. Every investor has to decide for himself, as it depends directly on how much risk he or she wants to take, and how much time he or she can put into the decision making process.
This article will help you make that big decision of how much money to put into mutual funds, and how much into stocks.
A mutual fund is a aggragate thousands of investors’ funds, and it spreads those funds over a large number of stocks and bonds. This gives the following 4 big advantages:
1 – Mutual funds make it much easier for you to create your investment policy. Simply match what you want with what is on offer. Lets say that you want only international or green stocks, then you could easily buy into an international fund or an alternative energy fund, and this would be much easier than searching by yourself into specific foreign or renewable energy companies.
2 – Mutual funds make it more simple to rebalance. If the market rockets, and you decide to sell some of your assets and invest the proceeds back in to something else, then this is much easier with mutual funds – you just have to sell whatever percentage you like of your fund shares. With stocks, it is more tricky, as working out what to sell can be extremely difficult. The ones that have done best? A bit of everything, or what?
3 – Mutual funds are a buffer from making big mistakes. A large ownership into a stock or a few stocks that go bad can hugely damage your portfolio. Unless the markets as a whole are crashing (ie – 2008), then you are unlikely to make such catastophic loses with mutual funds. This diversification tool is invaluable for many investors.
4 – Mutual funds save you a great deal of research time. To invest in stocks, unless you just want to wing it, you need to do lots of research into the individual compaines that you might be intereted in. This involves reading financial reports, and what stategies the company has to grow earnings. You must know how the sector as a whole is peforming, and what prospects it has in the time frame that you intend to invest for. This needs to be done for every stock that you want to invest in. To pick a mutual fund, however, you only need to do this once – look into the past performance of the funds that interest you, and decide which sector has the best potential.
Despite these natural advantages of mutual funds, as mentioned at the beginning of this article, the mutual funds vs stocks debate is a very personal one. If you are a more experienced investor with the time to put into research, and you are willing to accept higher risk in the race for higher returns, and have a clear idea of how you want to manage your portfolio, and how to diversify it, then stocks will be for you, especially as mutual funds come with fees of around 1.5%.
Personally, in my early investing days I began at 80% mutual funds and 20% stocks, but with experience and a greater knowledge of the markets this shifted gradually, and now I have 75% stocks and 25% mutual funds. That works best for me. Make sure you think very carefully about what works best for you!
For more information, go to:
en.wikipedia.org/wiki/Mutual_fund,
en.wikipedia.org/wiki/Stocks
