Whether you buy stocks or mutual funds depends on your personal circumstances and what you are trying to achieve – there is no single answer that fits everyone. That’s why some people trade stocks and others buy mutual funds – both are perfectly good investments, but they serve different purposes.
Here are some things to think about when you are trying to decide which one to invest in.
If you are just starting out in your 20s or 30s, then you are just beginning to save. Most young people start their savings by contributing to their 401(k) or IRA. They also don’t have much investing experience, and don’t have much money to spare. In this case, mutual funds are a good way to go. They automatically provide diversification – mutual funds hold lots of different stocks – which reduces risk. They also have small minimum investments – you may only have to put in $1000 to start.
However, if you are a more experienced investor – in your 40s or older – then stocks can be more attractive. Buying individual stocks gives you real control over your portfolio, which is a good thing if you know what you are doing. This is also better suited to investors who have a significant amount of money already – you really shouldn’t think about managing your own stock portfolio unless you have at least $50,000 to invest.
If having control over your taxes is important to you, then investing in stocks is often a better idea. When you invest in stocks by yourself, you decide when you buy and sell – which means that you control when you take capital gains or losses. Also, if you get advice from a portfolio manager, then the cost of this may be tax-deductible in certain circumstances.
On the other hand, if you are really not worried about when you pay taxes, then a mutual fund lets you take a hands-off approach. The fund manager will decide when to buy or sell to maximize your profits – so you don’t have any control over when you pay capital gains. There are couple of caveats however – mutual fund management fees are not tax-deductible, and you can still end up paying capital gains tax some years even if the mutual fund loses value.
Ultimately, the biggest factor to consider when choosing either stocks or mutual funds is your personality. If you like to get deeply involved in managing your financial affairs, then the only way that you are going to do this is to buy stocks yourself – mutual funds just don’t give you that level of control you are looking for. On the other hand, if you have a hands-off approach and just want someone to manage your investments well, then you are going to be much more comfortable with a mutual fund. You won’t have any visibility of the exact investments that the mutual fund is making, but as long as this doesn’t bother you, it’s a good way to get high-quality investment expertise on your side.