Which is better to use? Mutual funds or stocks? The answer to this question depends entirely on the person who is asking it. In this article, I will explain how you too can find the answer to the above question.
First, what type of investor are you? If you’re someone who doesn’t mind some risk, then picking individual stocks may be the perfect type of investment for you. Stocks always have some risk, but they can be quite lucrative.
The main risk from picking stocks is that if you have too much money invested in one stock, then you could lose all of that money if the company that owns the stock goes bankrupt. However, if you diversify albeit, say about fifteen to twenty stocks, then you will not have that problem. If one company fails, then the others will take up the slack.
There is also explosive revenue potential with stocks. Let’s say you own one hundred shares of a stock that is worth ten dollars. This makes the stock worth a thousand dollars. If this stock splits five times, then you will have earned a profit of thirty one thousand dollars(before tax).
This is also assuming that the stock price is still ten dollars per share. If the stock price is higher than that, then you have made an even greater profit. And if this stock pays a dividend, then you may just want to hold onto it for a few more years. Dividends add up over time, especially when you’re holding thirty two hundred shares.
Now for mutual funds. Mutual funds are safer than stocks, but that can be a problem. Because mutual funds are so diversified, they don’t have the same capability for explosive growth like stocks do. So there will be no enormous gains here. It’s reasonable to assume that you’ll earn between eight and twelve percent per year over the course of a decade. Some years will be bad, and some years will be good.
Another problem with mutual funds is the fees. You see, investment bankers want to make as much money as possible off of your investments. This, unfortunately, eats away at your revenue potential. But I’m sure the investment bankers appreciate your loyalty.
One alternative to mutual funds is an index fund. An index fund generally tracks the S&P 500, and it also boasts very low fees. Generally the fees are under .25%, which is much better than most mutual funds. You still will not see explosive growth, but your investments will be safer and will earn albeit more thanks to the lower fees. VTSMX(Vanguard Total Stock Mkt Idx) would be one example of a decent index fund.
In summary, if you can’t stand risk then mutual funds or an index fund is probably your best bet. However, if you don’t mind some risk and you want to possibly earn more money, then stocks are for you.