How do Mutual Funds and Stocks Differ

Whether you’re a first-time stock investor or a seasoned veteran, you should understand what differentiates single stock investments from mutual fund investing.

First, Some Working Definitions...

Picture a collection of stocks, bonds, or other securities that are purchased by a group of investors and then managed by an investment company. That’s a mutual fund.

When you buy a share in a fund, you’re really buying a piece of a large, diverse portfolio.

Conversely, stocks are shares of a single company.

Stocks vs. Funds:

The Management

When it comes to managing an investment, some investors prefer leaving those details and skills to someone else.

They like having an expert oversee the day-to-day decisions that a changing stock investment involves and see that as a distinct advantage. A good manager, they might argue, has access to information that would cost them an exorbitant amount, even if they had the time and inclination to do the work themselves.

On the other hand, some investors would never surrender control of their investments. Part of the thrill of investing is knowing that when they succeed it was due to their own decisions, these investors might say.

Individual comfort level plays a big part in your investment choice.

Diversifying Matters

When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. Diversification is a big selling factor for mutual funds.

But that’s not to say that an investor couldn’t diversify via his own stock selections.

Liquidity, Liquidity

Fund investors can cash in on any business day.

When you sell a stock, you must wait three business days before the trade settles and your money is released.

The Issue of Red Tape

Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings.

Transacting business with stocks can be a more complicated experience. Placing buy orders, selling shares, or dictating any number of orders can be time-consuming. To some, however, that’s just part of the experience.

In summary, fund investors are often attracted by the overall convenience. By way of contrast, stock investors may tend to be more comfortable with their own investing skills.

Remember the value of both mutual funds and stocks will fluctuate with the changes in market conditions, and when sold the investor may receive back more or less than their original investment amount.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Advice in magazines

I want you to imagine that you’ve got a serious medical problem. It’s a condition that threatens your health, life, finances, and the emotional stability of your family and friends. You know you have to find out what to do about it and soon. Do you have that image in your mind? Can you feel the uncertainty? Is there that knotted feeling in your gut that comes from fear?

Good, now I want to ask you a question? Can you imagine getting this medical problem solved by going to the bookstore, and searching for a magazine article about your condition? For most people the answer to that question is no. You will go to your doctor, or you may go to three. I’m sure you’ll follow-up with medical specialists and experts. What you won’t do is blindly follow medical advice found in a magazine article or newspaper written by a reporter. You will go to a professional. It’s plain common sense.

I must admit that I’m setting you up here. It’s easy for people to agree about seeing a doctor when facing a medical crisis. But many people take a far more cavalier attitude when it comes to their finances and investments. Unfortunately, all too many people get investment and personal financial information from articles written in magazines, and newspapers. Let me be clear, and blunt, doing so is most often a mistake—a BIG ONE!

When you see the headlines on the cover of Money, Forbes, or Fortune magazine, you have to understand that very few of these articles are written by financial professionals. They’re written by reporters, whose profession and skill is in writing, or interviewing people. They are not CFP’s™, or trained advisors that have been in the business of helping people secure their financial fortunes. The articles are typically very general, and often impart advice that professionals, such as myself, would not suggest.

Don’t get me wrong, I’m not saying you have to ignore an article in a magazine or newspaper that interests you. I am saying that you need to look and see if the article is written by a financial professional, and then talk to an advisor to see if the idea or advice fits your personal situation. Failing to do that is as bad as taking medical advice from a medical reporter. You can’t do it.

Your personal finances are one of the most important areas you must take care of in life. Not because money is everything, but because money affects in one way or another every other aspect of your life. College planning, medical crises, retirement planning, and more are all easier when your finances are set-up correctly. In order to do that you need to work with financial professionals, not follow the advice dispensed by financial reporters.

Kiara