Choosing between funds & individual securities | Vanguard (2024)

FAQs

Is it better to invest in individual stocks or funds? ›

Mutual funds have several advantages over individual stock picking. Beyond diversifying your holdings, some mutual funds aim to outperform the stock market, while others mirror a popular index like the S&P 500.

The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.

Mutual fund

Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

It is harder to achieve diversification. Depending on what study you are looking at, you must own between 20 and 100 stocks to achieve adequate diversification. 3 Going back to portfolio theory, this means more risk with individual stocks unless you own quite a few stocks.

Investing in individual stocks can generate higher returns than mutual funds and ETFs. The opportunity for higher returns is the primary reason some investors prefer to pick individual stocks rather than funds. Achieving a higher return can help you reach your long-term financial goals sooner.

Buying shares allows you to truly tailor your portfolio to the companies and themes you are interested in, while collective funds can be a cheaper, less risky way to invest. This is because you'd be pooling your money with other investors, usually saving time and spreading risk.

Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy. Investing with a group offers economies of scale, decreasing your costs. Monthly contributions help your assets grow. Funds are more liquid because they tend to be less volatile.

Mutual funds vs Shares

Before you decide which investment option is the best for you, understand the major differences between mutual funds and stocks. A mutual fund collects funds from multiple investors and invests the pool of money in a portfolio of securities. A share is a unit of ownership of a company.

Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases. Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.

What is one downside of a mutual fund? ›

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

Individuals, rather than corporations, hold most mutual funds shares because, in a corporation, it is likely to be more diversified when they own their shares or securities. The reason is that they can purchase their large financial securities - diversified means enlarging the number of investments.

The benefits of index investing include low cost, requires little financial knowledge, convenience, and provides diversification. Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).

So, yes, most firms can advise on individual shareholdings. But most firms do not! There are probably a couple of reasons for this.

There might be other practical considerations that limit the number of stocks. However, our analysis demonstrates that, whether you own ETFs, mutual funds, or a basket of individual stocks, a well-diversified portfolio requires owning more than 20-30 stocks.

As mentioned above, the amount of funds you hold is dependent on the funds you are comfortable monitoring in your portfolio. Some investors may prefer to hold several funds, for others, holding one fund may be easier to manage. There are a number of tools on our website that can help you choose a fund.

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.