Are you better off investing in individual stocks and bonds, or should you stick to mutual funds? According to Money Magazine’s Walter Updegrave, it depends on your answer to four key questions.
How much money do you have?
In short, if you don’t have a lot of money to invest, you’re better off in a mutual fund. It’s difficult, if not impossible, to build a sufficiently diversified portfolio on a shoestring, and trading fees can put a major dent in your returns.
How much time do you have?
If you go with individual stocks and bonds, you have to not only pick them, but you also have to keep fairly close tabs on them. While mutual funds also require a bit of a time, it’s a much smaller committment.
How much skill do you have?
No matter how much time and money you have, it’s probably a bad idea to go it alone if you don’t know what you’re doing. Are you capable of (and comfortable) evaluating whether or not a particular stock is fairly priced? Or whether a bond issuer will be able to make its payments? If not, then you’re not investing… You’re gambling.
How much desire do you have?
Do you really want to track individual securities? If you’re not genuinely interested in doing it, then you’re probably better off in mutual funds.
My thoughts: We’ve gone the mutual fund route for a couple of reasons. First, the low barrier to entry… You can get yourself a well diversified portfolio for just a fraction of what it would take if you went with individual securities. This was particularly important when we were just starting out. Second, I like not having to think about our investment decisions on a day-to-day basis. Between family and work, I’ve got better things to do than obsess over our portfolio. And to make our decisions even easier, we’ve focused exclusively on index funds. That being said, I do keep track of things. But it’s a lot easier to do so if you have a handful of funds rather than a complex portfolio of stocks and bonds. For better or worse, we’ve opted for
5 Responses to “Stocks and Bonds vs. Mutual Funds”
Big Mike —
Yes, they can double, but they can also be reduced to nothing. I’ll take the paint and get rich slowly. (Lots less time involved here too.)
Investing in mutual funds is incredibly boring. It’s like watching paint dry. Great fortunes haven’t been made by investing in mutual funds.
If you want to become enjoy investments and get rich, the only way to do it is by investing in stocks that can at least double, although ideally you want to hit that ten-bagger.
I used to do individual stocks until I learned:
1. They are like gambling (unless you invest the needed time)
2. MFs are very easy to set up automatically to dollar-cost average.
3. Index funds are great. 😉
I like to gamble as well (although I did not do so well at poker last night, only lasted about 3 hours) but I would not use investment money for it. I decide how much I’m willing to spend on an evening’s entertainment and sometimes (such as last night) it is gone, and sometimes I get it back, and sometimes I get back a bit more besides. But I always assume I am paying for a few hours entertainment.
Missing one key incredient… how much patience do you have? I like the thrill of gambling and I don’t like watching mutual fund values slowly tick up. *sigh* I’ll forever be poor.