A commonly asked question among new investors is, "Should I get into stocks or mutual funds?" I will examine this question today, looking at advantages of both and how you should use them in your portfolio. The truth of the matter is a mutual fund is usually just a collection of a lot of stocks, so there are a lot of similarities between the two. Even though the similarities are many, the differences are striking and each of these investment types cater to different forms of 
investors.
A stock is a share in the ownership of an indvidual company. A mutual fund is a financial intermediary that allows a group of investors to pool their money together to try to meet a predetermined investment objective.
The following is a list of questions you should think about when deciding which of these investment types are right for you.
- How much time can I spend keeping up with my investment portfolio?
- How much do I know about individual stock valuation?
- When will I need the money being invested?
- How much upside potential are you looking?
- How much risk are you willing to take on?
- How hands-on do you want your investment portfolio to be?
- How much does convenience mean to you in your investment selection?
Stocks are the type of investment that requires a lot of time, while mutual funds require far less. When choosing individual stocks, it is important to understand how a stock is valued and have solid reasons for picking that stock. A stock has far greater risk involved than a mutual fund, but also has a much higher upside potential. A portfolio of stocks requires a hands-on investment style, while mutual funds allow for and even encourage an investor who wants a professional to take care of their investments for them. The convenience of a mutual fund is important to some investors, since the mutual fund company takes care of record keeping for you.
After asking all of these questions and knowing the benefits of each, which is the better investment? There truly is no general right or wrong answer to this question. In individual cases there are certainly right and wrong answers. An older person closer to retirement who wants to take smaller risk, but still be in the equity markets would do well putting most if not all of their money in mutual funds. A younger person who is very risk averse and is simply looking for the best long-term return might choose to put together a portfolio of stocks.
In the portfolios that I manage I like to have a mixture of top stocks and mutual funds. There certainly is no rule that says you cannot mix the two, in fact it is a great idea. Consider your personal situation, ask yourself these seven questions, and then decide which route to take for your portfolio of investments.
Previously we have reviewed some of the top mutual funds and stocks for long-term investors here at GrowYourFunds. Here are the following articles designed to help the individual investor find some of the top investment options available.
Top 5 Large Cap Growth Mutual Funds
Top 5 Large Cap Value Mutual Funds
Top 5 Small Cap Growth Mutual Funds
Top 5 No Load and Low Expense Mutual Funds
Great post, Aaron. I really enjoy your writing. By the way, I run a big Article Directory and if you have some articles for distribution, you are very welcome to post them.
Regards,
Alex
http://www.wowarticlesonline.com/Category/Mutual-Funds/32
Posted by: Alex | August 25, 2007 8:07 AM | Permalink to Comment