Published October
2002
Mutual
funds vs. stocks: Which is ‘better’?
If
you’ve been investing for a while, you’ve probably been exposed to both
stocks and mutual funds. And, from time to time, you may have wondered
which of these investment types is “better.’’ Does one offer more advantages
than the other? If so, are you putting your money in the right place?
There’s no one “right’’
answer for everyone. In truth, both mutual funds and stocks offer distinct
benefits. Here’s a quick look at some of them:
Advantages
of mutual funds
n Diversification — When you buy
a mutual fund, you automatically achieve a degree of diversification,
because each individual fund may invest in dozens, or even hundreds, of
different securities — stocks, bonds, government securities, money market
accounts, etc. This diversification can help lessen the impact of downturns
that affect one particular type of financial asset.
n
Professional management — Mutual funds are run by professional “portfolio
managers” who possess years of experience in analyzing the markets and
selecting the mix of securities needed to achieve a fund’s particular
goals (growth, growth and income, income, etc.). Of course, there’s no
guarantee that your fund’s managers will live up to your expectations.
Yet, there’s no denying the fact that, just by investing in a mutual fund,
you are usually putting a great deal of expertise to work on your behalf.
n
Affordability — It doesn’t take much money to invest in mutual funds.
In fact, a person can set up a bank authorization to automatically invest
as little as $25 per month in some funds. Thus, it’s easy to invest in
a variety of mutual funds — which further diversifies an investment portfolio.
Advantages
of stocks
n Potential for bigger gains —
If you own an individual stock and it doubles in price, then you’ve made
a 100 percent profit. But if your mutual fund owns that same stock, then
the overall value of the fund may only increase slightly, if at all. However,
the price of your single stock could also drop by half. If this same stock
were in a mutual fund, the drop would not result in such a drastic decline
in the fund’s net asset value.
n
Lower investment costs — When you buy a mutual fund, you may have
to pay a sales charge — also known as a “load’’ — along with operating
expenses, which include management fees, 12b-1 fees and other expenses.
Together, these charges can reduce your overall return. But when you buy
a stock, you typically have to pay a one-time commission. (The same is
true when you sell that stock.) Consequently, more of your money is working
for you.
n
Greater control over taxes — Mutual fund managers constantly buy and
sell securities to boost the performance of their funds. Although you
have no control over these trades, they may have tax consequences for
you in the form of capital gains. When you buy a stock, you’re the one
who decides when to sell it. Therefore, you’re in control of when taxes
are paid on your gains.
As with any type
of investment, stocks and mutual funds carry risks, including the potential
loss of principal. It’s important to understand the risks as well as the
potential rewards before you invest. Your investment professional can
help you evaluate your situation and determine if mutual funds and stocks
are suitable for you. Ultimately, you may find that a combination of both
will help you meet your long-term goals.
Eric Cumley is an
Investment Representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 7,000 locations nationwide.
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