Whether or not you invest in mutual funds or individual stocks depends on the answers to so many questions, that the very question itself is nearly irrelevant. Take a look at the following; then you can decide what is best for YOU:
1. Are you willing to watch the market everyday?
2. Do you want to handle your own investments?
3. Do you have a substantial amount of cash to invest; say $10,000 or more?
4. Are you going to retire within the next 5 years?
5. Are you well-versed in the foreign and international world of economics?
If you answered “no” to several of the above questions and “yes” to #4, it would most likely be to your advantage to invest in mutual funds rather than individual stocks. Here’s why:
If you are investing in individual stocks, you need to keep an eye on the market, and to make changes in the names within your portfolio as the economic environment changes. If you want to make money in the stock market, you need to buy low and sell high. How can you do that very thing if you don’t keep your eye on the ball?
If you don’t want to be tied to the stock market everyday but you want to buy individual stock names and just hold them, you could buy good stock names that pay higher dividends keep them forever. However, if the market is a volatile one, like today’s market, you could do better by trading rather than always holding your stock positions. But, when trading, you need to not be greedy, so that you sell when in a reasonable profit. And you need to make the right choices; then you could do better by trading than holding. By the way, that IS a lot of “ifs,” and it is not a simple process. Also, good names don’t always remain good companies; Enron, anyone?
The next point is obvious; If you do not have a good amount of money to invest in individual stocks, you cannot possibly be well diversified. You can better diversify your portfolio by using a mutual fund because any mutual fund owns more than one or two names!
When you ask the question, “which is better, individual stocks or a mutual fund,” you also need to ask, “what kind of mutual fund?” The underlying securities within a mutual fund can range from domestic equities, (stocks) to international equities, to a blend of both, to income-producing debt instruments, (bonds) to tax-free bonds, to international bonds, to…do I need to go on? This leads to the next question; if you are retiring in the immediate future, what is your risk tolerance? If you have very little retirement savings, you should probably consider a very conservative investment; perhaps Cd’s or treasury bonds.
The last point is simple; if you don’t clearly understand economics, you will be gambling, not investing, when you buy individual stocks. I do not mean to imply that you need an MBA to handle your own equity portfolio, but you should at least understand how things work; for example, when would investing in a gold stock make the most sense? Answer: Generally when there is fear of inflation or world turmoil, gold stocks tend to perform better than when everything is sun-shinny out there on the economic front.
So, for the average investor, especially an investor who is near retirement age, mutual funds make more sense. There are so many factors controlling the market that, although mutual funds do fluctuate, unless you are prepared to pay attention and to do your homework, mutual funds make much more sense.