Mutual Funds vs. Stocks: Key Differences & Which Investors Should Pick
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If you're new to investing, you might wonder whether stocks or mutual funds are the best investments for beginners. When you invest in a stock, you buy a share of a single company, whereas a mutual fund is a collection of stocks, bonds, or other securities.
Mutual funds are generally considered a safer investment than stocks because they offer built-in diversificationโsomething that helps mitigate the risk and volatility in your portfolio. On the other hand, some stocks may offer higher earnings potential, which can help you grow your wealth and reach your financial goals faster. However, betting on a single stock is far riskier than investing in a well-diversified basket of assets.ย
Ultimately, deciding between stocks versus mutual funds comes down to your investment goals and risk tolerance. Here are the key features of stocks and mutual funds to help you decide which investment may be right for you.
Aktie | Mutual fund | |
---|---|---|
What it is | A share in one company | A portfolio of investments |
Investing style | Active | Passive |
Who makes decisions | Investor | Professional fund manager |
Costs | Commissions when you buy and sell; no ongoing fees after purchase | Annual expense ratios; may have sales loads, redemption fees, and transaction fees |
Diversification | Only as part of a well-diversified portfolio | Built-in diversification in a single investment |
Risk | Higher; performance is tied to a single company | Lower; risk mitigated through diversification |
Customization | High; you choose the stocks you want | Low; a fund manager chooses the investments |
How it trades | During regular market hours | Once per day |
Beginner friendliness | Low; you do your own research and analysis | High; a fund manager does the research and analysis |
Taxes | You control capital gains by timing when you sell | You can owe capital gains taxes even if you donโt sell your shares |
Mutual funds can bring instant diversification and stability to your portfolio, but they may not be suitable for every investor. Here are the benefits and drawbacks to consider.ย
Stocks can offer larger potential returns than mutual funds and are easier to trade, but there are risks and drawbacks to consider.
The mutual fund versus stock debate generally boils down to your personal goals and risk tolerance. Mutual funds are an excellent option if you want an easy way to diversify your holdings (i.e., set-it-and-forget-it) or don't have the time, interest, or expertise to research companies, pick individual stocks, and manage your portfolio. Mutual funds are also a smart choice for investors who want to avoid the emotional rollercoaster, stress, and sleepless nights that can accompany stock investing.ย
Of course, you might also consider ETFs vs. mutual funds. Both are investment funds offering built-in diversification. However, unlike mutual funds, ETFs trade like stocks during regular market hours and may subject you to fewer taxes.
Stocks offer larger potential returns than mutual funds, but the trade-off is increased risk. Stocks can be a smart investment if you have a higher risk tolerance, want control over your trading decisions, and are comfortable conducting your own fundamental research or technical analysis to pick investments. Stocks are also ideal if you prefer to minimize your trading costs and fees or want to control the timing of any capital gains.ย
Stocks offer investors the greatest growth potential, often providing strong, positive returns over the long haul. WiserAdvisor, for example, puts the upper limit at 60 stocks, not 30. That diversification (i.e., not putting all your eggs into one basket) is the key to lowering risk and increasing the chances of earning moreโeven during periods of market volatility.
Still, researching, picking, and monitoring 20 to 60 stocks takes considerable time and expertiseโsomething not all investors have. Mutual funds might be a more practical investment choice if you prefer a hands-off approach or want someone else making the decisions. Mutual funds offer exposure to stocks (and bonds and other securities) with the convenience of built-in diversification, but without the time-consuming research.
Of course, remember that you don't have to choose between stocks and mutual funds. Both can be part of a well-diversified investment portfolio that helps you grow wealth, save for retirement, and meet your long-term financial goals.
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.
Keep in mind that, like stocks, there are varying degrees of risk within the mutual fund universe. For example, short-term bond funds are generally safer and more stable than small-cap and credit-risk funds. So, if you decide to buy mutual funds, you can focus on ones matching your risk tolerance and goals.ย
While mutual funds can outperform the market occasionally, it isn't easy to achieve over the long run. A study of actively managed mutual funds by S&P Dow Jones Indices (a division of S&P Global) shows how large-cap funds performed versus the S&P 500 over the previous one, three, five, 10, and 15 years:
1 year | 3 Jahre | 5 years | 10 years | 15 years | |
---|---|---|---|---|---|
Underperformed | 51.08% | 74.27% | 86.51% | 91.41% | 93.40% |
Outperformed | 48.92% | 25.73% | 13.49% | 8.59% | 6.60% |
The study found that most actively managed mutual funds do worse than their benchmark index during most calendar years and over the long run. Notably, low-cost stock and bond index funds generally offer more predictable returns and lower costs than actively-managed funds.
You might consider moving money invested in stocks to a mutual fund if you want the convenience and built-in diversification that a mutual fund offers or someone else to make the investment decisions. On the other hand, you might opt for stocks if you're comfortable with more risk in exchange for higher potential returns.
Of course, you're not limited to one investment. Many investors hold an assortment of stocks and mutual funds in their investment portfolios and retirement accounts as part of an overall plan to build wealth.
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