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This includes both mutual funds and exchange traded funds ETFs.
Individual Stocks VS. Mutual Funds – Where Should You Invest? | xelenew.web.fc2.com
Mutual funds and ETFs are essentially portfolios of stocks and bonds. There are tremendous advantages to investing in funds. One is professional management. A fund is managed by an investment professional, who manages the entire stock portfolio. You simply invest your money and turn the management over to someone who does it on a full-time basis.
By investing in the fund, you can spread your money across dozens or hundreds of individual securities with an investment of just a few thousand dollars. There may or may not be a single commission involved in the purchase of the fund, but it will be a lot less than the collective costs of commissions on buying multiple stocks.
You can improve the cost factor considerably by investing in no-load funds, or in index funds that have very low expense ratios. And typically if you hold funds through a fund family, there are no commissions or loads at all.
The entire fund concept is hard to beat, especially for small investors. If funds are so great, is there ever any reason to invest in individual stocks? One is your own personal skill level in choosing investments. Some people develop the skill, and spent a lifetime trading individual stocks.
Some even get incredibly wealthy as a result. There are some advantages. Fund diversification actually limits gains, at the same time that it minimizes losses. But an individual stock can literally double or triple in a year. Some stocks rise many times over, over the course of several years. It also makes sense to invest in individual stocks if you have a strong knowledge of a particular industry. For example, if you work in the IT field and have a solid handle on the big picture of the industry, you might have real potential to earn high returns in the IT sector.
But even beyond being a trader, if you have the insight and the patience to buy and hold stocks of well-established companies, the kind that pay above-average dividends and show long-term growth patterns, you can outperform the general market over the long-term.
Despite the advantages of investing in individual stocks, there are significant risks.
You may not have the skill level necessary. Just as it only takes a few winning stocks to pull up an entire portfolio, it only takes a few to produce large losses. A few months later it was a penny stock. Lack of adequate diversification. True diversification is more complicated than most people understand. You have to make sure that your money is spread across various sectors , and unrelated asset classes. That means investing beyond stocks, including allocations in other investments, such as bonds, real estate investment trusts , or even commodities.
A stock market crash. This is also the whole purpose of adequate diversification. If you are invested too heavily in one or two stock sectors that seem to be successful, these may get hit harder in a crash than the general market. We just discussed market crashes, and this is where timing plays an especially vital role.
But that also means that you can buy too heavily at market tops, and then panic sell at the bottom of a crash. Both have the potential to create very large and long-term losses. That will enable most of your portfolio to at least keep up with the general market. If you have an interest in a certain market, or in certain companies, you may want to consider holding a few individual stocks in your portfolio, along with those funds.
If the stocks that you purchase represent companies that have proven long-term track records of growth, and a consistent record of paying out dividends, they may provide an opportunity for you to increase your overall portfolio return.
So tread lightly with individual stocks, until you yourself have a track record and the confidence to wade in a little bit deeper.Why Should Amateurs Buy Individual Stocks?
For more information on how to start investing, check out our primer for new investors. Do you keep a lot of individual stocks in your portfolio, or do you prefer to go with funds? Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut. He has backgrounds in both accounting and the mortgage industry.
He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at OutOfYourRut. Your email address will not be published. The content on this site is for informational and entertainment purposes only and is not professional financial advice.
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