Individual Securities or Mutual Funds?

Individual securities or mutual funds? This question confronts people from the moment they become investors. Will a portfolio of stocks and bonds or a few well-chosen mutual funds better serve your purposes, means and temperament? The answer is, as so often in life: It depends.

Why Mutual Funds?

One of the most commonly cited advantages of mutual funds is diversification. Investors may find it difficult to assemble a portfolio of individual stocks across a wide range of market sectors but a limited portfolio of stocks may not be sufficient to cushion the effect when one or two of the holdings perform poorly. So, some people invest in mutual funds to diversify their investment portfolios.

Another advantage is that mutual fund owners also benefit by having their assets managed by professionals. Few, if any, nonprofessionals have the knowledge and experience that mutual fund managers and their staffs put into analyzing stocks and market conditions.

A third advantage is liquidity. Investors can quickly obtain cash by redeeming fund shares at the then current net asset value. Of course, an investor can sell individual stocks, too, subject to industry settlement rules. But which stocks should be sold and what will be the effect of the sales on the investor’s portfolio? A sale of a portion of a mutual fund investment won’t necessarily alter the diversification of the investor’s portfolio.

Why Not Mutual Funds?

Perhaps the most compelling argument for choosing to own individual investments is the degree of control you retain. Another reason is that it’s relatively simple to keep track of your stock and bond holdings, how much of you each own and, if you like to follow your investments closely, how each of the investments is doing on a daily basis.

That’s a tall order with mutual funds, which may own shares in a large number of companies. Of course, you can follow how the fund itself is doing, but it’s not feasible to expect to keep track of the full collection of securities in a mutual fund.

Taxes are another issue. When a mutual fund sells stocks or bonds at a gain, the gain is passed through and you pay the capital gains tax. Because mutual funds distribute dividends and capital gains at year-end, purchasing shares late in the year means you may receive a portion of your investment back fairly quickly – as a taxable distribution. With individual securities you decide when to sell. Gains and losses in different holdings can offset one another when securities are sold resulting in a lower tax liability.

The benefits of diversification are important but a mutual fund that owns shares in a highly successful company won’t have the impact on your investment return that owning the shares individually will produce. Performance of a particular stock is diluted by the overall performance of all the shares. Of course, knowing what stock is likely to bring big rewards is another matter!

The question that arises often in an investor’s mind is: How much stock of a particular company should I own? Generally, it’s not a good idea to put more than 10% of your money into the stock of a single company. Similarly, most professionals do not recommend putting more than 20% into companies in the same industry. If a particular company or a particular industry (think of the “dot.coms” of the 1990s for example) does poorly, these limits keep your losses to a minimum.

Investing With Confidence

Whether you are choosing individual securities or mutual funds, the advice of a professional can prove invaluable.

We will be glad to be of assistance. Our clients enjoy a number of advantages when they choose us to help manage their investments. Chief among them is our ability to assist you in defining your investment goals, develop an investment strategy and choose the specific investments that will help you achieve those goals. In sum, we can create a strategy that is custom fitted to meet your needs and circumstances.

We are always ready to answer your questions and address your concerns. We will make the necessary modifications to your strategy and investments as changes in your personal circumstances and the economy dictate.

To find out more, please contact us.