When you start buying stocks for the first time as an investment, you really have two ways to go: 1) buy mutual funds or 2) individual stocks.
Mutual funds have exploded in popularity in recent years. They are an easy way for investors to put their money in the stock market and have it “managed” by a professional. For people with little time and/or interest in keeping up with the business world, mutual funds have provided the perfect solution.
Individual stocks on the other hand, let an investor laser target their money at specific companies they think will do well. Their money is totally in their control and it is up to them how much research and maintenance they do on their stock portfolio.
Why I Don’t Like Mutual Funds
I don’t invest my money in mutual funds for much the same reason many people like them: they are too ‘hands off” for me and I like to have more say where my money goes. Here are some reasons why I avoid funds:
1) Right now there are thousands of mutual funds to choose from so picking one of them is surely just as hard as picking an individual stock. Where do you even start if you want to find a good fund to invest in? I honestly don’t know!
Do you pick a fund by its past performance? How about by what stocks it is invested in? Or do you by into a fund because the manager is well respected? None of these ways is any guarantee of future performance and it seems you need to be willing to do A LOT of research if you really want to pick the right fund that aligns with your investing goals.
2) Mutual funds usually buy stock of dozens or more companies. With some effort you will be able to find a list of what each mutual fund invests in but after that how do you analyze things? Picking one fund over another seems more complicated to me than just figuring out a handful of stocks you want to buy.
3) Fees, some hidden and some not. When you buy a mutual fund you have to pay fees every year. Sometimes the fees come off the front end and sometimes the back end but either way, you are paying to have your money managed. If your investment strategy is buy and hold like mine is, you will usually be paying less fees on the few stocks you buy than you would if you had your money in a fund.
4) You learn more by buying your own stocks individually. As mentioned before, the main reason the average person likes mutual funds is because they can put their money into one and supposedly forget it. Let the fund manager do all the work.
But when you invest that way, what do you learn about managing your money and investing? Very little if anything at all. By managing your own portfolio that contains individual stocks you have a front row seat to all your mistakes and successes. You learn what works and what doesn’t and you gain a better understanding of economic issues and how the business world works. You become more educated about finance and you will be better suited later in life to intelligently plot a course for your retirement.
5) Finally, it is MY hard earned money I am investing and I want to have total control over what I invest in. Mutual funds put your money in the hands of the fund manager and understanding what went wrong or right is harder to determine. When I am buying my own stocks, I win or lose solely on the decisions I make and that appeals to me more than turning my money over to someone else.
Buying Individual Stocks
Many investment experts advise investors of all levels to put their money in mutual funds. These “experts” don’t believe most regular people have the capacity to make informed individual stock picks and the time to do the homework necessary to make money in the market.
Buying and selling stocks is simple to do and absolutely anyone can open an online broker account for free. I would choose TD Ameritrade for most investors because it is a highly rated brokerage (see its 3rd place ranking in the 2017 Barron’s list) and it is the one I personally use for my portfolio seen on the front page of this website. There are no minimum requirements to open an account which makes it a great choice for those who are just getting started investing in the stock market.
Over time, any investor can start to buy stocks and learn what their risk tolerance is as they learn about the market and how it works. I also feel that any investor can also form an intelligent opinion of just about any stock and figure out how much they want to invest.
The reasons I like buying individual stocks are pretty much all the reasons listed above why I don’t like mutual funds. To me it just seems simpler to concentrate on the market stock by stock rather than by baskets of stocks. If I want diversity then I make sure to buy stocks in a variety of industries. Every stock pick is my own and win or lose, I am 100% responsible for the outcome.
I Do Own Three Mutual Funds In My 401K
I’m not totally against mutual funds as I do have money in them through my workplace’s 401K program. Most 401K’s won’t let you trade individual stocks and only offer you a handful of mutual funds to choose from. I have done well with those as they have mirrored the market over the last 6 years.
I must concede that buying stocks individually isn’t for everyone. For instance, if you are someone who is totally disinterested in finance, economics, and business, putting your savings in mutual funds would be preferable to buying individual stocks. This is because your lack of interest in the stock market will greatly hinder your learning and will make it difficult for you to put in the effort needed to succeed. For you, mutual funds are the perfect investment vehicle.
For me though, I will continue picking my own stocks and trying to pick more winners than losers. It is something I enjoy doing that has turned into a hobby I hope to be doing for the rest of my life.