A self-professed aggressive investor for the past two years, Joseph Smith can enjoy hobbies such as traveling around the globe or spending precious moments with his national champion show dog. The Oakland, California, resident just returned from a trip to Honduras compliments of the cash he made from his investments. Says the 51-year-old freelance photographer: “The market has given me total freedom over my time, allowing me the option to pretty much choose what I want to do.”
Smith is not pressured to use his camera to pay the utilities or cover the mortgage on his home, valued at $1 million, that he and his wife, Janis, just bought from a National Basketball Association star. How has he done it? Through shrewd portfolio building.
Although he has mutual funds, Smith prefers individual stocks as his long-term investment vehicle. He believes equities offer him a much higher return. The Smiths have become such successful investors that they have become “platinum” members of Charles Schwab & Co. Inc., a status that requires $1 million or more in personal assets and 48 commissionable trades a year. That’s quite a leap for Smith, who began investing after discussing stock opportunities with one of his fraternity brothers while working out at the gym one day.
Decisions, decisions. In order to get the best returns, many investors ask whether they should plow their dollars into mutual funds or individual stocks. Of course, the selection process requires more than just casual conversation. The nation’s red-hot economy prompted the Federal Reserve to raise interest rates six times since last June, making for a volatile climate as investors watch the slow retreat of this record-shattering bull market.
So how do novice, conservative, or experienced investors choose? Basically, it depends on several key elements: your risk tolerance, the potential tax liabilities, your need for diversification, and how much money you can spend comfortably and still pay the bills if the market tumbles.
Experts like Weslia V. Echols, a financial advisor at Prudential Securities in Detroit, says it depends on an individual’s financial objectives and their personal situation. Factors may include cash flow; the preference for hand-holding while making investment decisions; the desire to buy or sell stocks independently; and the time frame to meet a particular goal, such as buying a home or developing a retirement fund. Though there are no clear-cut answers regarding your choice to buy stocks or mutual funds, the following examples will help you weigh the pros and cons, and may serve as a guide in picking the right investment vehicle.
THE CASE FOR FUNDS
Peter W. Johnson Jr., a registered investment advisor who produces greenjungle.com, an educational Website for investors, maintains that the factors influencing the choice between mutual funds and stocks include risk, costs, convenience, and tax ramifications. Many mutual funds offer investors instant diversification and allow them to get started with as little as $1,000 or less. In comparison, stocks can be purchased for the price of a single share, although brokerage commissions-which can average $30 to $50 per