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 with the right plan.
This same problem can occur when looking at stocks or mutual funds for your equity 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!
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 that you can eventually transfer to a pros and cons list.
Your research on gyms could include the cost, the time required to get there, and the hours they are open. With mutual funds, you may research what you need to do to invest, and what you need to know and minimum cost to start an investment.
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.
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 which option better fits your personality and needs.
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, make a choice and start implementing! The sooner you start your program the better.
Below are some of the differences to consider for investing in stocks versus mutual funds.
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, especially when dealing with smaller stocks that might be just starting out.
- If you hold the stock long enough you can reduce fees from ongoing mutual fund management fees.
- 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%. For more on what a mutual fund is: (What is a Mutual Fund)
Characteristics of Investing in Mutual Funds
- 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. This is a great feature for new investors.
- 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.
Need help finding an investment plan that works for you? Learn about my financial coaching services, so you can be on your way faster!