Mutual Funds Versus Stocks
Investing through mutual funds versus investing directly in stocks &bonds?
There are some differences here between each investment strategy, and you must weigh the pros and cons of each.
1. Mutual funds have a manager that allocates funds among stocks and/or bonds, whereas investing directly in stocks means you are making the decisions yourself.
2. Diversification, or minimization of unnecessary risk should be your desire. True statistically significant diversification can be achieved with 30 individual stock picks. Mutual funds can easily achieve this because they have plenty of funds and can buy large enough positions. In order to achieve diversification on your own, it would require you to research and choose this many stocks.
3. Trading fees required when trading large positions, as mutual funds are more likely to do, versus small positions, as an individual trader is more likely to do, will be smaller for mutual funds than for yourself. Those fees are spread out among investors in the fund, but you must bear those transaction fees yourself.
4. Most people don’t know, but 75% of money managers fail to “beat the market” every year. What does this mean? It means that if you invested in the stock market index (which represents all the stocks on the market), you would do better than 75% of money managers out there. Plus, they’re charging you a fee to select these underperforming stocks and bonds.
5. If you trade often enough for the IRS to consider your trading a business, you have all the issues of filing taxes, wash sale rules, etc. that you don’t have when investing in a mutual fund. The mutual fund shields you from all that, so all you have to look at is your profit line.
So, the call is really up to you. It’s a personal preference. Some people don’t have the time to research stocks and feel safer with a professional. Others like to feel in control and pick their own. Consider what above is important to you, decide what your tolerance level is, and either find appropriate mutual funds or appropriate individual securities to invest in.
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