Mutual Funds vs Stocks - Deciding Which is Best For You (2024)

Stocks

The stock of a corporation is all the shares into which ownership of that corporation is divided. Essentially, a stock is a part ownership of a business. This provides you with an opportunity to profit when the share price goes up and lose when the share falls.

Here is a short video from my YouTube channel where I explain what a stock is in more detail.

Mutual Funds

A mutual fund is an investment fund that is professionally managed and pools money from investors to purchase securities.Mutual funds typically charge annual fees of 0.50-2% and are generally comprised of stocks and/or bonds.

Now that you know what they are, it's time to explore these options and give you a better understanding of each.

Click the link below to learn what a mutual fund is—on my YouTube channel!

Stocks – Advantages

I will now explore some of the advantages of purchasing your own stocks.

Highly Liquid

Stocks are highly liquid, meaning they can be readily bought and sold during trading hours. This, of course, depends on the stock; however, stocks are more easily bought and sold than mutual funds, as I will explain further below.

No Management Fees

You can potentially save 0.50-2% a year by purchasing your own stocks. This may not sound like a lot; however, when we consider the average US stock market returns over the past 100 years, we see a different story.

The S&P 500 index grows by about 10% a year including dividends. Therefore, a 2% annual management fee is reducing your potential gains by 20% annually.

If you want to attain average market returns through a fund without paying significant fees, you should consider theVanguard S&P 500 ETF.This fund has a minimal annual expense ratio of0.04%.

You Control Your Money

When purchasing your own stocks, you are the fund manager. Depending on your situation, you may consider this a disadvantage; however, I consider this factor an advantage.

If you prefer your funds managed by a professional, that is fine. You will simply have to pay annual fees of around 0.50-2.00% for this privilege or consider an index fund as mentioned above.

Low Minimum Buy-In

The minimum buy-in for a stock is typically the price of one share. Although some brokerages require you to make a minimum investment, typically around $500.

This figure is far below that of most mutual funds, as I will explore below.

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Stocks – Disadvantages

Here are some disadvantages of picking your own stocks.

Time Consuming

Researching and purchasing enough stocks to build a diversified portfolio can be time-consuming.

Let's imagine you invested $10,000 in a stock trading at $5—and the stock falls and is now trading at $2.50 a share. Your $10,000 investment is now worth a mere $5,000—simply because you failed to diversify your holdings.If you had owned a diversified portfolio of ten or more stocks, your loss would likely be less significant.

Essentially, picking your own stocks is a time-consuming task, one that many prefer to delegate to a professional.

Requires Supervision

Managing a diversified portfolio of stocks requires an ongoing effort from the investor, as I will explore below.

You will have to regularly assess your stocks to ensure they are likely to perform well in the future. Whilst also ensuring that your money is not better spent elsewhere.

Companies typically release financial reports one to four times a year. And reading through ten or more annual reports that are typically over 150 pages long, is an endeavor on its own. Let alone trying to do this while working full-time.

Essentially, mutual funds may be favorable to you if you have limited time to regularly assess your stock holdings and adjust accordingly.

Mutual Funds – Advantages

Here are some of the advantages of investing in mutual funds.

Diversified Portfolio

Mutual funds typically hold a diversified portfolio of stocks. This reduces your potential for loss during bear markets and increases your chance to profit during bull markets.

There are cases to be made for, and against diversification within your investment portfolio; however, for simplicity's sake, we're going to put it down as an advantage. To learn more about diversification, visit the link provided.

Professionally Managed

Mutual funds are actively managed by a professional portfolio manager. They will typically have a bachelor's degree in a financial discipline. The Master of Business Administration (MBA) and Charted Financial Analyst Charter (CFA) are common designations among portfolio managers.

According to the Bureau of Labor Statistics (BLS), Portfolio managers typically have fiveyears or more of experience in another business or financial occupation, such as an accountant, securities sales agent, or financial analyst.

Convenient Way to Own Stocks

Mutual funds are simply a convenient way to gain exposure to the stock market.

To sum up, they are often actively managed by a professional, are inherently diversified and are an easy way to exploit the power of compound interest.

Mutual Funds – Disadvantages

Here are some of the disadvantages of placing your money in a mutual fund.

Managed Funds May Have High Expenses

Some funds charge significant fees, annual fees of 1-2% are common. For example, theColumbia Global Technology Growth Fundis a growth fund with $US1.39 billion AUM and has an annual expense ratio of 1.31 percent. After you pay the 5.75% front-end load or “buy-in” fee.

High Minimum Buy-In

Mutual funds will generally have a minimum buy-in of $1000-2000; however, some funds require an initial investment of $5,000,000 or more. Once you have made your initial investment, there is no minimum buy-in on subsequent purchases.

Can Only Trade After Market Close

Trades are only executed after the market has closed for the day, once the Net Asset Value (NAV) has been calculated and price adjusted.

Whereas, you can purchase stocks at any time during trading hours—unless trading has been halted for that stock.

Summary

Purchasing stocks that are likely to provide you with above-average returns in the future can be time-consuming and tedious.

Whereas, a mutual fund will take care of everything for you. Mutual funds are a great way to gain exposure to the stock market and to harness the power of compound interest—without actively managing your own funds.

I have summarized the previous points below.

Stocks – Advantages

1. Highly Liquid

2. No Management Fees

3. You Control Your Money

4. Low Minimum Buy In

Stocks – Disadvantages

1. Time Consuming

2. Requires Supervision

Mutual Funds – Advantages

1. Diversified Portfolio

2. Professionally Managed

3. Convenient Way to Own Stocks

Mutual Funds – Disadvantages

1. Managed Funds May Have High Expenses

2. High Minimum Buy-In

3. Can Only Trade After Market Close