Are you better off investing in individual stocks and bonds, or should you stick to mutual funds? According to Money Magazine’s Walter Updegrave, it depends on your answer to four key questions.
How much money do you have?
In short, if you don’t have a lot of money to invest, you’re better off in a mutual fund. It’s difficult, if not impossible, to build a sufficiently diversified portfolio on a shoestring, and trading fees can put a major dent in your returns.
How much time do you have?
If you go with individual stocks and bonds, you have to not only pick them, but you also have to keep fairly close tabs on them. While mutual funds also require a bit of a time, it’s a much smaller committment.
How much skill do you have?
No matter how much time and money you have, it’s probably a bad idea to go it alone if you don’t know what you’re doing. Are you capable of (and comfortable) evaluating whether or not a particular stock is fairly priced? Or whether a bond issuer will be able to make its payments? If not, then you’re not investing… You’re gambling.
How much desire do you have?
Do you really want to track individual securities? If you’re not genuinely interested in doing it, then you’re probably better off in mutual funds.
My thoughts: We’ve gone the mutual fund route for a couple of reasons. First, the low barrier to entry… You can get yourself a well diversified portfolio for just a fraction of what it would take if you went with individual securities. This was particularly important when we were just starting out. Second, I like not having to think about our investment decisions on a day-to-day basis. Between family and work, I’ve got better things to do than obsess over our portfolio. And to make our decisions even easier, we’ve focused exclusively on index funds. That being said, I do keep track of things. But it’s a lot easier to do so if you have a handful of funds rather than a complex portfolio of stocks and bonds. For better or worse, we’ve opted for