To hit the gym, to do an at home program, to hit the wild out doors or to do a combination of all of them, that is the question.
When deciding where to workout the choices can be endless.
For some there is no question about which one is right, but if you are like me all of them can work with the right plan.
This same problem occurs when deciding if you should invest in stocks or mutual funds.
So how do you decide what is the right answer for you? Using three easy steps you can make your choice and move forward!
The first step is to research each option and get the basic facts.
The more information you have the better informed your decisions are. Create a list of features and benefits for each option that you can then compare.
Include things like costs, time required, and ability to get diversity in your portfolio.
After you have gathered all your information you can begin comparing them to your personality and life style. The best way to do this is with a pros and cons list for both mutual funds and stocks.
An example would be with a mutual fund you don’t need to know as much about the individual stocks. So if you are short on time this would be a positive for you.
When done you can place them side by side to see which option better fits your personality and needs.
After looking at all your options make a decision that fits your life. Not your neighbor’s life or the financial guru on TV – but your life. Once you have made your choice jump in and start investing.
To help you get started I put together some of the differences between stocks or mutual funds.
A Stock is a share of ownership in a company. You buy it through your brokerage account. You would be the investor on record.
Characteristics of Investing in Individual Stocks
- You buy the companies you believe in or that you think will do great.
- Emotions can creep into your investing decisions. For example: you pick a stock and then won’t sell it when it is time because your pride is on the line. Even if you would not buy it today, you may have trouble pulling the trigger to sell. This may cause you to lose money.
- Fun to actively learn and invest – stocks can be more engaging to the investor who wants lots of involvement.
- More knowledge needed – when you are picking individual stocks you need to know more about the market. You would need to understand what can drive a stock price and what a good business looks like.
- More time commitment. You need to be following the stocks on a fairly regular basis to keep up with market and company changes. This is especially true when dealing with smaller stocks as they can be more volatile.
- If you hold the stock long enough you can reduce fees from what ongoing mutual fund management fees are. This is because with a stock you only pay a fee when you buy or sell.
- Manage your tax liability easier. Mutual funds distribute gains at least once a year from their trades. When you own individual stocks you manage when you buy and sell. Thus controlling when you take a tax hit. (Does not include dividends).
- You get a greater ability to fine tune which category you want to emphasize. Thus if you preferred small growth companies you could favor that over large value companies.
- You need more money to invest to achieve diversification.
A mutual fund is an investment that pools many investors’ monies together. It has a professional money manager selecting the investments for the group.
Think of it as a type of co-op. Everyone piles their money together for a better outcome for everyone. The mutual fund makes money by charging you a management fee every year.
Depending on your fund this can range from .08% of the funds under investment to upwards of 2.5%. For more on what a mutual fund is: (What is a Mutual Fund)
Characteristics of Investing in Mutual Funds
- Requires less time to maintain your portfolio. After you have done the research on which mutual fund to invest in you can sit back and let the manager do the work. You should still check on them at least once a year to make sure you still like the fund.
- More diversification. An important aspect of a good portfolio is to be diversified. Because the mutual fund is buying many stocks you automatically get diversification. No matter how much you invest. This is a great feature for new investors.
- Less stock market and business knowledge needed. Because you leave the stock picking to managers you need only to focus on what makes a good mutual fund. Not the intricate details of stocks and their industries.
- Easier to buy on a regular basis with small amount of money. You can set up an automatic withdrawal and you are off and running. This allows you to invest smaller amounts of money, on a more regular basis. This also keeps costs down as you avoid the per trade transaction fees that come with stocks. Just make sure you are investing in no load funds to get this benefit.
- Easy to reinvest income to keep your investments growing. Not all stocks and brokerages offer fractional share purchases.
Remember everyone has different preferences, you need to make the right decision for you. Don’t worry about what your neighbor is doing, worry about what is right for you.