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Whether you're an experienced investor or you're just dipping your toes in investment waters for the first time, some questions remain the same. Among the most important: Should I invest in individual stocks and bonds or in mutual funds?
Why select individual securities? One of the biggest positives of individual securities ownership
is the fact that you have more control over what's in your
portfolio. You buy. You sell. And you also have a greater ability
to manage your investments from a tax standpoint.
It takes a lot of research, time, and commitment to assemble a portfolio of individual securities, and only with substantial assets can you achieve diversification. Before getting started, ask yourself these questions:
If so, investing in individual securities may be the answer for you. Keep in mind that creating a fully diversified portfolio will incur brokerage fees, and you may pay a premium if purchasing only a small number of shares. Some investors turn to securities as a fun way to dabble in the stock market. This can certainly offer some thrills, as investors watch their stocks go up and down. However, these investments should be kept separate from a core portfolio and not counted on for longer-term goals. Why choose mutual funds?Instead of purchasing individual stocks and bonds, many investors choose mutual funds as their main investments. Mutual funds provide an easy way to enter the market without a great deal of work or a lot of cash.By pooling money from a number of investors, a mutual fund provides greater buying power for individuals. And, because a fund buys and sells many securities at a time, its trading costs are often lower than you would pay for individual securities. Here are a few more reasons to consider mutual funds.Diversification. Diversification may be the prime attribute of mutual fund investing. That's because a mutual fund invests in dozens – even hundreds – of securities. Because your investment is spread out over many different securities, your exposure to any one is limited, and your level of risk is decreased.As an individual investor, it could be difficult for you to buy such a wide variety of investments because the cost may be prohibitive. Professional Money Management. When you buy shares in a mutual fund, you automatically get full-time professional money management. The fund's management team analyzes hundreds of securities and makes decisions on what and when to buy and sell. These decisions are based on any of the following criteria: thorough research into a company's fundamentals, such as earnings and the health of its financial statements, as well as current conditions within the industry, the region, and the overall economic environment. Needless to say, these resources are often hard for the individual to match. With professional management, once you've chosen a fund that's right for you, there's no need to constantly monitor individual securities in order to make changes – the fund manager does it for you. Affordability. You may be wondering, “Why not just invest in a number of individual stocks myself and get the benefits of diversification?” Let's take a look at some numbers. The Dow Jones Industrial Average is comprised of only 30 different stocks. But if you were to buy 100 shares of each of those stocks at any given time, you would have to invest more than $100,000. If that seems like a lot, consider how much it would take to invest in 100 shares of each of the 500 stock holdings in the Standard & Poor's 500 Index, or the NASDAQ Composite Index, which includes more than 4,000 stocks. In contrast, an investor can purchase a mutual fund with hundreds of holdings for as little as several hundred dollars, depending on a fund company's minimum requirements. Liquidity. An investor typically can sell shares of a mutual fund on any business day. You don't have to wait for the fund company to find a buyer for your shares because it is ready to redeem existing shares at any time. |
