Choosing between funds & individual securities | Vanguard (2024)

FAQs

Choosing between funds & individual securities | Vanguard? ›

Mutual fund

Stocks are more appropriate for investors who can monitor their portfolios and the stock market for opportunities. Mutual funds are more suitable for investors who want a fund manager to do all of the work for them. Bernat summarizes what investors should consider before choosing the right approach for their portfolio.

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

Pros of Holding Single Stocks

You no longer have to pay the fund company an annual management fee for investing your assets. Instead, you pay a fee when you buy the stock and one when you sell it. The rest of the time there are no additional costs. The longer you hold the stock, the lower your cost of ownership is.

Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them. You get exposure to all the investments in the fund and any income they generate.

Investing in ETFs or mutual funds can be less risky than investing in individual securities. You can complement the ETFs or mutual funds in your portfolio with specific stocks and bonds.

By investing in mutual funds, an investor can more affordably invest in those same (or other) stocks since they're pooled together. But remember that there will be ongoing management costs that must be paid to your advisor for their efforts, while an investment in stocks will only require the initial investment cost.

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.

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

Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock.

Why don t more people use index funds? ›

Another reason some investors don't invest in index funds is that they may have a preference for investing in a particular industry or sector. Index funds are designed to provide exposure to broad market indices, which may not align with an investor's specific interests or values.

Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don't have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals.

Financial pros like Benz urge investors to build broadly diversified portfolios for a reason: While the overall historical trajectory of the stock market has trended upward, any individual stock has a chance to decline sharply in price and destroy your portfolio's returns.

One of the primary benefits is diversification, which reduces the risk of loss by spreading investments across a wide range of assets. Mutual funds also provide professional management, allowing you to leverage the expertise of fund managers who make investment decisions based on their research and analysis.

When interest rates rise or fall, investors in mutual funds and ETFs may be more likely to experience volatility in the performance of their investment, while investors in individual bonds who hold their bonds to maturity may not realize any impact.

Since mutual funds are overseen by a fund manager and are often actively managed funds, there are annual costs incurred, called expense ratios. Individual stocks do not incur these same fees and expenses, although buying and selling shares can incur expenses.

Mutual funds and ETFs may hold stocks, bonds, or commodities. Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.

Access to different markets

You might also need an investment to serve a specific role in your portfolio, such as generating income or adding stability during periods of market duress. Mutual funds can provide access to many different parts of the market, even within the broad asset classes of stocks and bonds.