When trying to decide between owning individual stocks or mutual funds, a lot comes down to the type of investor you are. Are you a bit more conservative, like true diversity, and don’t mind paying an annual fee to invest your money? If so, then mutual funds might be the answer for you.
Or, do you not mind being a tad bit under diversified and prefer to pay only to purchase and sell the asset? If that sounds more like you then perhaps individual stocks are more your bag. Either way, it is important to understand the pros of cons of both investment vehicles.
The Case For Individual Stocks
There are several benefits of owning individual stocks. For one, you only pay the brokerage fee when you buy and when you sell the stock. Also, if you truly believe in the company your money won’t be diluted amongst many different companies like it would in a mutual fund. Now understand that most financial advisors would caution you against not having a diversified portfolio. However, it’s your money and if you want to invest in a single company stock you have a right to do so.
Another benefit of purchasing stocks individually is that there are no management fees. That pesky management fee that most mutual funds charge their owners is non-existent. Then, there is the issue of tax consequences. With stocks you are able to decide when a taxable event occurs, meaning, when you sell the stock for a profit or loss. That is very different from mutual funds where they distribute capital gains and losses at their will and you have no control over that transaction whatsoever.
The Case For Mutual Funds
Perhaps one of the biggest benefits of mutual funds over stocks is sheer diversity. When you purchase a given mutual fund, depending on the type of course, you could instantly own hundreds of different companies. That is truly the definition of spreading out your risk. Should one of the companies go bankrupt your loss will be buried amongst all the other companies in the portfolio. This is very different from an individual stock wherein you carry all of the risk associated with that company.
Manage Your Own Money Or Hire A Money Manager?
Another issue to consider when buying mutual funds is that you have a professional money manager making your investment decisions for you. Not comfortable (or not qualified) to choose individual stocks? Well then mutual funds are likely a great choice for you. Fact is most money managers have a financial education behind them whereas most everyday investors simply do not. Think of it this way – if you need brain surgery do you want your friend the restaurant manager to do it? Or, do you want a doctor with many years of experience behind him? Drastic example I understand. However, the point remains, most of us are better off leaving the investment of our money to educated professionals. If you need help finding a good mutual fund, there are many credible financial magazines that can help you narrow down your choices.
When it comes down to it, deciding between a portfolio made up of individual stocks versus a mutual fund, the decision is a personal one. There are pros and cons to each solution and ultimately it is a very personal decision.
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