Ask Stacy: Which Is Best — Individual Stocks or Stock Mutual Funds?

Welcome to “Ask Stacy,” a short video feature answering money questions submitted by readers and viewers. You can learn how to send in a question of your own below.

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Today’s question is about whether you’re better off investing in individual stocks or a stock mutual fund.

If you’re not familiar with these things, stocks are simply shares of ownership in a specific company. Because an individual stock is concentrated in one company, it offers the best potential for reward.

Stock mutual funds, on the other hand, allow you to own a small slice of a bunch of different companies. Because they’re diversified, mutual funds offer more safety.

Which option is best for you? Here’s what I think.

For more information on this topic, check out “10 Tips for Sane, Successful Stock Investing” and “8 Basics That Beginning Investors Must Know.” You can also go to the search at the top of this page, put in the word “investing” and/or “mutual funds” and find plenty of information on just about everything relating to this topic.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, everyone, and welcome to your Money Q&A question of the day. I’m your host, Stacy Johnston, and this question is brought to you by MoneyTalksNews.com, the best in personal finance news and advice since 1991.

Here’s our question. It comes from Frank. Frank says, “Which investing option do you prefer? Purchasing stocks that pay dividends, or the mutual fund approach?”

I was a stockbroker for about a decade, and I’d buy stocks personally all the time. You’d think as an expert with every available tool, I must have made a lot of money buying stocks. I didn’t. I lost money almost every year when that was my job. Sounds counterintuitive, especially since as soon as I left that business, I started making a lot more money owning stocks.

Why? A couple of reasons.

First, when I was a stock broker, I’d chase stupid rumors, often fed to me by my peers. Today, I work alone and only buy quality stocks with solid fundamentals. Also, when I was a broker, I traded a lot. Now, rather than trading, I invest. I hold for long periods of time.

Result? Today it’s rare when I lose money in stocks.

But I digress. Let’s go back and take a look at our question. Frank, here are three things to know.

One: Buying individual stocks takes a lot more work than buying a mutual fund.

A mutual fund, for those of you who don’t know, is simply a portfolio of stocks or other securities carved up into little slices. So instead of owning one stock, you own a bit of a whole bunch of different stocks. That’s a lot less risky.

That’s why buying stocks takes a lot more work. You’re putting your money into one company and hoping that company does well. Since your investment is in one place, you’ve got to make sure it’s the right place. Make sense?

Number two: Since buying individual stocks is riskier, the best way to lower the risk is the increase the number of stocks you own.

Example: I own General Electric. I bought it really cheap, during the Great Recession. And for years it did really, really well. Then all of a sudden, a few weeks ago, they announced some bad news and now the stock is half what it was. Ouch!

In a mutual fund, the screw-up of one company wouldn’t have affected me as much.

Final point: While individual stocks are riskier, they also offer a better opportunity to hit a home run than with a mutual fund. For example, one of my biggest winners is Apple. I paid about a buck and a half for it, split adjusted, many years ago. Now, it’s worth more than $160. So, when you’re right, you can make major money with an individual stock — something harder to do with a mutual fund.

Bottom line: Buying individual stocks can be a way to make a lot of money — if you get the right stock, you get it at the right time, and you hold it for the right length of time. So, my advice to you, Frank, is to buy both. Invest primarily in mutual funds. But if you’re willing to do some homework, invest in a stock or two and see if you might be able to hit that home run.

OK, that’s our question for the day. Let’s close with a quote. This one comes from Will Rogers.

“Too many people spend money they haven’t earned to buy things they don’t want, to impress people they don’t like.”

Keep that one in mind. I’ll see you here next time. Make it a profitable day!

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About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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