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Are Mutual Funds or Stocks Better for You

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 as to which one is right, but if you are like me all of them can work but sometimes finding the right one for right now is the actual problem.

This same problem can occur when looking at stocks or mutual funds for your investments.  So how do you decide what is the right answer for you?   Using three easy steps you can make your choice and move forward!

Research

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 traits that you want to discover and can eventually transfer to a pros and cons list.  So your research on gyms could include the cost, the time commitment to travel, and hours open.  With mutual funds, you may research what you need to do to invest, and what you need to know.

Evaluate

After you have gathered all of your information, the next thing to do is to evaluate how what you found fits into your personality and life style.  The best way to do this is with a pros and cons list.  This is an easy way to make a decision on if something is good or bad for you and to create a visualize picture of this.  With working out at a gym if the distance from your house or work is over 10 miles is this a negative due to your schedule?  If so it goes in the con list.  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.  Do a pro and con list for each option that you are looking at, when done you can place them side by side to see who has the strongest positive side and which one has the positives that are most important to you.

Choose

After looking at all of 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.

Don’t get distracted about the method of investing (or exercising), make a choice and start implementing!  The sooner you start your program the better.

Check out the guide to mutual fund and stock differences below for more information:

A Stock is a share of ownership in a company.  You receive a share of the profits if they are distributed in the form of a dividend or a return on the company reinvesting the profits by a greater stock appreciation.

Characteristics of Investing in Individual Stocks

  • You purchase the companies you believe in
  • Emotions can creep into your investing decisions – example: you pick a stock and won’t sell it because you picked it even thought all other indicators point to sell
  • 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 it helps to know more about each of the stocks measurements and what can drive a stock price.
  • More time commitment – you need to be following the stocks on a fairly regular basis to keep up with market and company changes
  • Hold long enough you do avoid the management fees that the mutual funds have, so your costs can be lower.
  • Manage your tax liability easier (mutual funds distribute gains at least once a year from their trades), you manage buy and sale on an individual stock, thus affect when you take a tax hit.  (Does not include dividends).
  • Greater ability to fine tune which category you want to emphasize (small, medium, large cap and/or growth, value or both).
  • You need more money to invest to achieve diversification.

A mutual fund is an investment that pools many investors’ monies together and has a professional money manager selecting the investments.   Think of it as a type of co-op everyone piles their money together for a better outcome for everyone.  They make money by charging you a management fee every year.  Depending on your fund this can range from .33% of the funds under investment to upwards of 2.5%.

Characteristics of Investing in Mutual Funds

(What is a Mutual Fund)

  • Requires less time to maintain 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 once or twice a year to make sure you still like the fund.
  • More diversification – because the mutual fund is buying multiple stocks you automatically get diversification in your portfolio no matter how much you invest.
  • Less knowledge needed – because you leave the stock picking to managers you need only to focus on what makes a good mutual fund and 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 for a small amount of money and you are off and running.  This allows you to invest smaller amounts of money, on a more regular basis.  Also keeps costs down as you avoid the per trade transaction fees (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 offer fractional share purchases (some do with a direct purchase program).

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