Single Stocks or Mutual Funds?

July 6, 2007 By Matthew Paulson

There’s always been quite a debate among seasoned investors as whether to invest in single stocks or in mutual funds when investing in the stock market. Much like every issue in the history of the universe, there’s not a consensus on the issue. Some favor searching for quick and fast returns through single stocks, while others take a more risk adverse approach through mutual funds. There are different situations in which each strategy makes sense, but the question remains which makes the most sense for you. Should you invest in mutual funds, or single stocks? Let’s find out.

Choosing individual stocks can allow you to get a great return over a short period of time if you choose a good stock. This will never happen in a mutual fund because of it’s diversified nature. However there’s an equally likely chance you could lose a large amount of money if you happened to invest in the next Enron or Worldcom. Mutual funds will protect you against major losses from choosing a bad stock, but they will also prevent you from riding a great stock and making a lot of money in a short amount of time.

Choosing mutual funds is a much easier task than choosing single stocks. They require a little upfront research finding a fund that’s worthwhile to invest in, but after the money’s there, you can check your fund every year or so and make sure it’s performing compared to other funds in its class, and go on with your life. Choosing single stocks is a much more daunting task. It requires a large amount of homework for success. Most professional investors recommend you do 1-3 hours of research in investments a week.

Single stocks can cost you a significant amount of money if you buy and sell holdings on a regular basis. Most of the day-traders in the dot-com boom didn’t lose their money because they made really bad investments; it’s that they got eaten up by all of the fees and capital gains taxes in their trades. Before you put money into single stocks, you’ll want to have a significant amount of money saved up so that the fees are much smaller relative to the amount of money that you are investing. Mutual funds usually don’t cost anything to get into in the first place, but your gains will be slightly reduced by the expenses of the fund. Careful planning can easily minimize the amount of fees that you have to pay by investing in a solid fund with low fees.

Mutual funds are usually a much better option for small-time investors just wanting to prepare for their retirement. They offer a much lower risk while maintaining very reasonable rates of return. Single stocks are great for people who have some money to play with and have plenty of time to make investing their hobby.

Posted in investing

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