Question: Should You Invest in Mutual Funds or Stocks?
Answer: Whether you invest in mutual funds or stocks depends on how much risk vs. return you are prepared to handle. If you want a higher return, then you must accept a higher risk. It also depends on how much time you have to learn about individual companies, which is necessary before buying that company's stock, vs. the smaller amount of time needed to learn about mutual funds.
Risk Return Tradeoff
By pooling a lot of stocks (in a stock fund) or bonds (in a bond fund), mutual funds reduce the risk of investing. If one company in that sector has a bad manager, or a losing strategy, it is balanced by other companies that are performing better. This lowers the risk, thanks to diversification. For example, an energy fund in 2000 that included Enron stock would have declined with Enron's demise, but not nearly as much as those who only had Enron stock...they would have lost their entire investment.Time Available to Learn About Stocks vs. Mutual Funds
To learn about investing in stocks, you need to research which company is the best investment. To do company research, you need to learn how to read financial reports to see how much money the company is making, and what strategies it is using to grow earnings. You must stay apprised of how the economy is doing, and how that will affect that company and its industry. You will want to pick companies who are in industries or sectors that are on the upswing.To pick mutual funds, you don't need to learn how each company is doing - that is what the mutual fund manager does. However, you still need to research the past performance of the mutual funds. You also need to decide which sectors seem most promising. Of course, you still need to know how the economy is doing.
Mutual Funds FAQ
- What Are Mutual Funds?
- Should You Invest in Mutual Funds or Stocks?
- How Can You Pick Good Mutual Funds?
- How Do Mutual Funds Interact With the US Economy? More US Economy Q&A
