When investing in stocks, a big decision is whether to invest directly in individual stocks or through mutual funds. Mutual funds give you a lot of things, some diversity and professional management are the principal concerns. But you still have to check on the fund performance and the fees can add up to a significant amount of money. Choosing individual stocks yourself takes a lot of time and you need to have several stocks to diversify your investment.
Many funds target their investments; Large Cap, Small Cap, Sectors, Growth, Income, the list of terms goes on and on. Some investors hold several funds each in different areas and in different proportions to reflect their feelings. Generally though, it is not a good idea to have too many funds. Too many funds together behave like the market as a whole, loosing whatever skills the fund managers have in choosing good investments and performing worse than a simple low overhead index fund. An index fund is a fund which attempts to follow the performance of a stock index, like the S&P 500, with minimal administration. Index funds tend to have lower fees than other funds because they do not do much research or think about the investments, they just invest in the stocks of the index in the proportion of that index.
Investing in stocks requires more attention, but you can control your capital gains taxes and dividends better. And if you do have a single stock which has doubled or more since you bought it, it becomes a nice currency for charitable contributions. Larger charities often accept stock donations which may allow you to deduct the market value of the gift, avoiding capital gains altogether.
| Funds | Stocks | ||
|---|---|---|---|
| Pros | Cons | Pros | Cons |
| Professionally Managed | Fees | Knowing your Investments | Research Work |
| Easy to Maintain | Little Control | Tax efficient | Work to Maintain |
| Diverse | Over Diverse | Selecting Winners | Hard to keep Diverse |
Copyright © 2007 Jeffrey Anton