Stocks or Mutual funds for $1,000, please. There has been an age-old debate on which is better as an investment. Some say stocks because you are actually owning the company, some say mutual funds because there is the belief that there is diversification, therefore less risk. There are people that I know who swear by mutual funds and others who wouldn’t touch them with a ten-foot pole. This article discusses some factors to consider before investing in either. Personally, I think it comes down to three factors: Control, Education and Time.
The Control Factor of Stocks Or Mutual Funds
One of the proponents of a good investment portfolio, whether that be in stocks or mutual funds or bonds or ETFs, is a degree of risk management. We have discussed risk management in my earlier post on ETFs, so I will be brief in this article. Risk management is defined by its name really. In finance, Risk management is the ability to identify, analyze and potentially control uncertainty.
Therefore, one of the key distinctions between investing in Stocks or mutual funds is control. How much actual control do you want over your investments? If the focus is letting the market just affect your portfolio versus you taking control of your investments managing them, then maybe Mutual Funds are the best option.
Research and Risk Management
Stocks require quite a bit of research and potentially more focus on risk management than mutual funds. Based on the general understanding of diversification, mutual funds have less risk. That is to say, mutual funds are large bucket investments and they have an investment manager. If you put money into a mutual fund you do not have any ownership of the company’s they invest in. Simply, you are giving your money to someone else to manage and hope they do a good job.
When you buy a share of stock, this is a piece of ownership of the company. Ownership is an asset. When you invest in mutual funds, you don’t own anything. You buy a share of a mutual fund and participate in the appreciation, but you aren’t buying shares in the mutual fund company or in the shares of the company’s that they purchase. Some would consider buying shares of a company is a better investment since you own a piece of the company versus part of a mutual fund investment. I would suggest that it depends on your long term goals. If you want to own parts of companies and earn dividends on that ownership, then buy stocks. If you are just hoping for capital appreciation without much work, then buy mutual funds.
Mutual funds trade daily, but there is no way to get out of a mutual fund quickly if the market is going down. They only trade once per day. This is after the stock market closes. Conversely with stocks, if you see the market in a downturn, you would be able to get out of that investment immediately, even if you took a loss. Being able to trade intra-day is a way to monitor your risk. However if you are planning on consistently investing in a mutual fund via an automatic investing plan (AIP), then maybe being able to trade daily isn’t important.
Education Is Key When Deciding Between Stocks Or Mutual Funds
The financial gurus will tell you that the perfect investment allocation is based on your risk acceptance level. They will take this model and try to explain why you should be in 60 percent large cap equities and 20 percent small or mid cap equities with 10 percent in international and 10 percent in bonds. And you might be thinking, “what is a cap?” Cap is short for Market Capitalization. This means, effectively, the size of the organization in the stock market. The total number of shares of stock outstanding multiplied by the current per share stock price.
Recommendation From Advisors
One thing to take into account before blindly following their advice is that they are basing this recommendation on past performance and expected risk level of the investments. They have no idea if that is the best model for you. They are solely basing their recommendation on past performance and expectation. However, do they not clearly state that past performance does not indicate future results? So, they are covering themselves just in case the portfolio goes down “unexpectedly” but also saying that the portfolio allocation is the best for you. Does that make sense?
Please do not misunderstand, I have a great deal of respect for financial advisors. I am simply saying that there is an element of personal ownership. You should educate yourself when it comes to your investments. There are a lot of incredible financial advisors out there who really know their trade, but there are also some out there who don’t. Your financial education will be able to spot those who know and those who don’t. For more on financial advisors, check out my post on ‘Financial Advisor Services’.
Investing In Your Own Education
When you invest in your education, it’s an investment that has unlimited return. The application of knowledge is power. Stocks or mutual funds do not have to be a mutually exclusive question. Recently, I learned about stock slices where you can buy fractional shares of companies and work towards creating your own mutual fund. Simply with 100 dollars you can buy fractional shares of multiple companies.
Your Time Is Valuable
Another important aspect of investing is time. This is not only the time horizon before retirement but also the time you can dedicate on your investments. Time plays a very important factor on deciding between stocks or mutual funds because many people assume that mutual funds require less time commitment. I think that is actually an industry misdirection.
Mutual fund companies want to sell their services. The mutual fund advisory industry is a multi-trillion-dollar business. They want the consumer to believe that when you invest in mutual funds you don’t have to spend time deciding on which stock or doing lots of research. They want you to feel secure that they are acting in your best interest.
Have to be honest, sounds like a sales tactic. Of the three topics discussed in this article I specifically left time for last, as it ties the other two together. If you don’t have time to learn about investing or to educate yourself, then you won’t understand how to control your risk. So, by default, investing in stocks sounds scary. It makes you think there is too much risk. Well, enter the mutual fund. They can supposedly give you all the upside without the time commitment and since they are diversified, there is much less risk. Learn more about financial education in my post on ‘Financial Literacy‘.
The idea of just continuously storing money away into a mutual fund every month will give you the time freedom to think about all the other things in your life that are more important. However, here’s the thing, your time is valuable, but you should really dedicate the same amount of time to stocks and mutual funds. They both have nuances that need to be addressed.
Mutual funds have fees, stocks typically have only one fee, a commission, and many brokerage firms aren’t charging that anymore. Mutual funds are less liquid than stocks. Meaning you cannot sell the mutual fund quickly. However, access to the cash from a sale is quicker with mutual funds. Stocks give you more control over your investments and can delay taxes.
My Final Take Between Stocks or Mutual Funds
When it comes to stocks or mutual funds, deciding in which to invest can be dauting. When I first started investing, it felt like that midway game at the state fair. The one where you have a dart throw it at a balloon on the wall. If it pops the balloon, you get the prize that corresponds with whatever was in the balloon. Sometimes investing feels this way.
I will strongly urge anyone considering investing in stocks or mutual funds to do as much research as you can stomach. Read books on both, if you don’t have time to read, listen to audio books in the car. How badly do you have to listen to that radio station? Half the time it doesn’t present anything worthwhile except traffic reporting.
Investment Books On Stocks Or Mutual Funds
If you need recommendations for investment books, I have six below:
- ‘The 3 Percent Signal’ by Jason Kelly
- ‘The Little Book of Common-Sense Investing‘ by John C Bogle
- ‘The Intelligent Investor‘ by Benjamin Graham
- ‘How to make money in stocks‘ by William J O’Neil
- ‘Unshakeable‘ by Tony Robbins
- ‘The only Investment guide you will ever need‘ by Andrew Tobias
Honestly, the more you know about this topic, the better. This is your future. Do I think that investing in stocks or mutual funds is the most important thing in life? Obviously not, but if you would like to add paper assets to one of your asset classes and possible grown some passive income from investments, do not only listen to “financial gurus” and blindly follow what they say. Many years ago I learned a saying, “if you don’t know what to do with your money, I’m sure someone will.” Perhaps it is an offshoot of “a fool and his money are soon parted.”
Full disclosure, I invest in stocks, bonds, mutual funds and options. These are just one of the assets classes known as “paper assets”. So, I’m not trying to say that mutual funds are not a worthwhile investment. I would suggest that research, risk management and time are the most important aspect of any investment. However, if you want more control over your investments, stocks would be better than mutual funds. Remember to have a risk management strategy mapped out. In essence a way to control the possibility of the stock value decreasing.
The nature of this article is not intended to make you decide one or the other, stocks or mutual funds. The intention here is to understand the benefits and risks of both. It is a completely acceptable investment strategy to have both. My intention is to help educate anyone that is willing to learn. I hope you enjoyed this quick review of two good investing vehicles. Happy Trading!
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