Mutual Funds or Stocks: Which Investment Is Better for First Time Investors?
by Dr. Steve Sjuggerud, Investment U Advisory Panelist
Monday, November 04, 2002: Issue #186
If you’re trying to get started out on the right foot as an investor, and are considering whether you should buy mutual funds or stocks, this article will make your decision much easier.
Many investors – without ever realizing it – actually get started off on the wrong foot and end up with the entirely the wrong message about how to invest successfully. Here’s what I mean
A few shares of Disney stock sure sounds like a fun investment, no? Or in your case, you may think you can’t go wrong by starting out with a few shares of Coke or Intel, right?
To both of these, I’d say “wrong!” In 1998, shares of Disney were worth $40. Now they’re worth less than $20. Coke and Intel haven’t done much better. You may say, “Sure, but these stocks will come back some day.”
But there are no guarantees – you could very well lose it all in one stock. (How about WorldCom?) You see, buying one or two stocks – as simple as it sounds – is just taking on too much risk.
It’s true an investment in Disney may seem like “fun.” But the beginning investor may thank you more down the road if you really end up making some money. And you’ll be able to learn a much more valuable lesson about how the markets work if you have an investment that has gone up over the years.
The key is – as with most investments – you’ve got to spread the risk. Fortunately, even if you have only a few bucks, you can spread your risk by buying a mutual fund, where the chance of losing it all is about zero.
Mutual Funds: All The Benefits Of A Big Investor Without All The Cost of Stocks
Mutual funds are the best place to start. You’ll get all the benefits of being a big investor, without giving up much at all just because you’re starting small. The benefits are so great; you may even decide to never buy individual stocks.
With a small investment (say $1,000 or less) in a mutual fund, you actually end up owning hundreds of stocks, which spreads the risk. A professional fund manager manages this portfolio of stocks, so you don’t have to be the stock-picking expert. Fees per year can come in at less than 1%. And the money is not tied up – if you need your money tomorrow in a mutual fund, just call the fund today and tell them to send your money back. It’s a great system.
How Mutual Funds Work
But what exactly is it you’re buying? When you buy a mutual fund, you’re actually buying shares of the fund. The fund takes your money and combines it with money from other investors like you. So a mutual fund is a big professionally managed pool of money – so big that many funds have over a billion dollars to manage. That’s why expenses can stay low.
There are all kinds of different stocks and mutual funds out there today; so many, in fact, that getting started may seem like a chore. But it’s not for someone just getting started; a good place to start would be the Vanguard Total Stock Market Index Fund (symbol: VTSMX). This fund is the best way for you to emulate the performance of the entire stock market. It mimics the Wilshire 5000 Total Return Index. Since inception over a decade ago, it has averaged 8.5% a year.
Vanguard is the 10,000-pound gorilla in the mutual fund game, especially when it comes to funds that mimic indexes. Fund expenses for the fund I mentioned are a tiny 0.2% a year – way below 1%. (There is a $10 a year fee if your account value is less than $10,000.) These fees are as small as you’ll find for money management anywhere on the planet.
Here’s How To Get Started With Mutual Funds
How can you get started in this Vanguard? It’s simple (and it’s basically the same for investing in any mutual fund). Contact the mutual fund company and ask for a “prospectus” (the fund’s legal document that covers its backside). Fill out the application, and send ‘em your check. That’s really it. To reach Vanguard, go to www.vanguard.com or call 877-662-7447.
Though the topic of mutual funds of course could span hundreds of pages, I’ve given you just the minimum you need to know We’ll cover more another day. Today, my simple goal was to show why a fund makes more sense as a first investment, and to give you a good “starter” mutual fund for those first investment dollars. I think we accomplished that for you…
Good luck and good investing,
Steve
Related Investment U Articles:
- Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis is Imminent
- ETF’s are Great, but Don’t Overlook Closed-End Funds
- Closed-End Funds vs. ETFs: Are You Missing Out On “Secret” Profits From Emerging Markets?
- Timing the Market: If Only You Knew What Mark Hulbert Knows…
- How to Determine Which Option Investment Strategy is Right for You
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