Stocks vs. Mutual Funds

During these times, many Americans are afraid of the stock market. Will it go up today? Or will it go down? Since we've entered into this recession, many financial institutions have fallen, including Wachovia, Merrill Lynch, and Washington Mutual. If our money isn't safe in the banks, how about taking our money to the stock market? That's where this question arises, "Should I invest in sole stocks or mutual funds?"

Some believe that a definite answer does not exist. Instead, the answer is different for each person and is dependent on that person's answers to these four questions: 1.How much money do you have? 2. How much time do you have? 3. How much skill do you have? 4. How much desire do you have? Michael Brush, a writer for MSN money, believes this notion, especially in the line of question number 2. He states that if an investor goes with stocks, they will have to research each and every company they purchase stock in, which can be time consuming. "Well, why don't I just purchase stock in one company to prevent me wasting my time doing research?" That would be okay if you weren't lacking one thing; diversity.

Brush, among other supporters, agree that in order to achieve diversity, an investor will have to purchase stock in multiple companies. Well, that's basically the definition of a mutual fund. "A mutual fund is a diverse holding of stocks that are managed on behalf of the investors that buy into the fund. A mutual fund allows an investor to take advantage of a diversified portfolio without having to invest a large sum of money." (http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html). For me, if I'm going to tie my money to an aspect of the stock market, I would prefer to have a diverse portfolio; that way, a decline in one company's stock will not be the end of me. Plus, a mutual fund is monitored by an investment professional who have done research on the companies included in the mutual fund. It doesn't guarantee that I will be without risk, but it does give me a better sense of security seeming the answer to the number 3 question for me is "none."

Mutual funds show to have more advantages than individual stocks. Besides the well known fact of diversification, mutual funds offer benefits like a cushion in case of stock market volatility and the splitting of transaction fees (a typical disadvantage of participating in mutual funds). As stated before, mutual funds do not come without risk nor cost. However, a key topic taught in risk management is that diversification reduces the amount of risk faced.

During my internship, I heard many of my coworkers discuss the recent and dramatic decline in their 401Ks. As most of us know, that is a retirement fund that is heavily tied to the stock market. And yes, participants know the risks of this retirement option before the opt to get in; however, I'm sure that none of us were expecting the drop that occurred. So if I had to choose, in this time and day, whether to invest in stocks individually or a mutual fund...., my pick is definitely a mutual fund.

Sources:
1. http://en.wikipedia.org/wiki/Mutual_funds#Mutual_funds_vs._other_investments
2. http://useconomy.about.com/od/mutualfundsfaq/f/funds_vs_stocks.htm
3. http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html
4. http://www.401khelpcenter.com/press_2009/pr_crain_012609.html
5. http://www.fivecentnickel.com/2006/01/12/stocks-and-bonds-vs-mutual-funds/
6. Brush, Michael. "What's a P/E? (And 9 other 'dumb' questions)." MSN Money. 5 March 2009. 31 March 2009 <http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx?page=1>.