How to invest money: mutual funds or stocks?
You have money that you would like to make a safe and ample return on. Learn how to invest your money to make it go the furthest.
The question has once come across every investors mind: Mutual funds or stocks? This question is mostly asked by the beginner who wants to start investing, but doesn't know where to put his or her money. What is the answer to the question? There is no correct answer, but it can be argued for either side. Determining whether to put your money in mutual funds or stocks depends on you. How you will determine which is best is what I'll show you.
Stocks are shares of ownership in a company. You can buy shares through a brokerage at the price per share. Historically, the stock market has averaged annual returns per year of 11 percent. Of all the different types of investments, stocks will give you the most for your money. However, stocks can also be the most volatile. Risk and return go hand-in-hand. In the long run history has shown that financial markets recover, so stocks should be considered investments for the long run.
A mutual fund is a huge collected amount of money from a large group of investors that the mutual fund manager uses to buy lots of different stocks, bonds, and/or other assets that meet the company's investment criteria.
When you buy shares in the fund, you become a shareholder. When you give your money to the fund, you are giving your money to the expert money manager of the mutual fund.
Mutual funds give you diversification and expert money management which allows you to sit back and relax.
Your choice of whether to pick a stock or mutual fund, is based on comparing their risk, return, and their expenses. You should also look at the pros and cons of both mutual funds and stocks.
Mutual funds carry a low amount of risk. If you are a low risk taker, mutual funds may be for you. If you can't stand watching your money going up and down every day by large amounts, then invest in mutual funds. Why are mutual funds such safe and low risk investments? Because they diversify. They give your money a little taste of everything. The fund will invest your money in a number of different stocks in different industries. That way, a single company's depreciation can balance out with another company's appreciation.
Mutual funds are generally good investments for retiring, saving for college, or any other goal that needs time. If you have some money that you don't need anytime soon, and don't want to take too much risk or spend time tracking your investment, then invest your money into a mutual fund.
However, mutual funds do have their disadvantages. The biggest disadvantage to know about a mutual fund is that most mutual funds underperform the stock market's average (represented by the S&P 500 Index) every year. 90 percent of mutual funds, in the last decade, have underperformed the market. Think about it, all those "expert" money managers can't even beat the market.
"Mutual funds are boring!" That's what anxious investors who want to gain their wealth a little quicker say. They think of investing their money in stocks as an adventure and can live with price fluctuations, while they scowl at leaving their money in a snail speed mutual fund.
The beginner often sees what the expert overlooks. Who says you can't invest better than a fund manager? Regular people do it all the time. A blind folded monkey can throw darts at a stock listing and compete very well with the money mananger. While the fund manager is looking at all his numbers the common investor is using common sense.
Both mutual funds and stocks can be for long term investors. But over the longer period of time, the stocks will prevail over the underachieving mutual funds. Those who cling too tightly to the familiar deny themselves many opportunities. There is no progress without risk.
Written by Paul Nowak - © 2002 Pagewise