Choosing Stocks or Mutual Funds

••• Image Source/Image Source/Getty Images

If you are just getting started investing, you may be wondering whether to buy stocks or mutual funds. Though either can be a good investing strategy, the best financial choice for you really depends on your longterm goals, your investing experience, your existing investments, and your risk tolerance.

Generally speaking, investing in stocks is riskier, since all your money is investing in one single company. If you invest in a mutual fund, it means you are buying a pool of stocks from all different companies. This means your investment is more diversified, so it's less risky. Read on for tips on how to decide the better investment vehicle for you.

Think About Your Personal Preferences

Do you prefer to be more hands-on with your investment portfolio? Or would you like for it to be professionally managed? Do you have a high tolerance for risk? Would you get upset if the market trended downward and you lost some money? Is this your first time investing in the stock market or have you been investing for years? What does your overall portfolio look like?

These are all good questions to ask yourself before deciding whether to buy stocks or mutual funds. If you are inexperienced, professionally-managed mutual funds are a good choice. But if you have more experience investing, and already have invested in some mutual funds in your portfolio, then it's fine to invest in stocks, too. Just be sure that your portfolio is diversified.

Check the Track Record

You should look at the track record of the stock or mutual fund you are considering. It should have a good track record and be a solid company.

If you are looking at a mutual fund you should look at the track record of the of the fund and the company that manages the fund. Remember, mutual funds are professionally managed, which can be a good thing for a novice investor. You want to purchase a stock with a good track record, and a mutual fund with a good record.

Look at Market Potential

Here's what we mean by that: look at the growth potential of the market of the stock or mutual fund you are investing in. If it's a growing sector of business, like technology or social media, then it's likely a good investment. But, if it's in a sector of the market that's struggling, like a newspaper company, then it does not make sense to buy stock in a company whose market is decreasing.

You want to invest in a company that's growing and expanding their market. When you are considering a mutual fund, you should look at the types of companies they are investing in, and make the same judgment calls.

You also need to keep an eye on the companies and make sure that the principles that made you feel that the stock was a good investment are still in place, that the leadership is strong, and the company continues to grow. You can learn more about a company's performance by listening to quarterly earning calls or reading earnings reports.

Don't Panic in Difficult Markets

Regardless of which investment vehicle you choose, the real key in being a successful investor in the stock market is to keep your cool, especially when the market is down. Investing for the long haul will also help you make money, not lose it because you panicked and sold your stock when it went down.

Other Investing Tips:

  1. If you are unsure about which stocks to pick, talk to a financial advisor. They can offer help and guidance about how to choose stocks that fit inside of your financial plan.
  2. Remember to diversify your investment portfolio. This means that you should have your money invested in several different stocks and/or mutual funds. It is foolish to have all of your money in one stock or mutual fund because if it were to fail you would lose everything. Diversifying spreads the risk. This is why it is important to have investments in addition to your 401(k) and other retirement accounts.
  3. Do not begin serious investing, aside from retirement, until you are debt free, except for your mortgage. It does not make sense to invest when you are paying high interest rates. Take the time to set up a debt payment plan today.
  4. Consider subscribing to a service that will give you updates on your stocks and mutual funds so that you can keep an eye on the market. Additionally, keep an eye on the health of the company. Reading annual reports and plans will help you to better understand if the company is still one that you want to invest in.
  5. If you are working on getting out of debt, you can practice investing by choosing specific stocks or mutual funds and track how they do over time. This can help you understand the market better so that when you have money to invest, you can do it confidently.

Updated by Rachel Morgan Cautero.