Mutual Funds or Stocks? Finding your best investment balance

Team RINO INVEST
January 25, 2021

Building a fortune through investing is a dream most of us have had at one time or another. An investment of $40 in Coca-Cola’s 1919 IPO is worth nearly $400,000 today; reinvesting dividends over the decades would have put more than $10 million into your pocket. That’s some serious cheddar.

Since we can’t time travel into the next century to scope out the financial future, most of us have to build wealth the old-fashioned way: inheritance (this only works if your family is already rich) or education, persistence, and investing. Spoiler alert, the second method can work for anyone.

Over time, the stock market has shown itself to be the lowest barrier to entry asset class generators of wealth. There are a couple of different ways you can start investing in the stock market.

1. Individual shares of stock: Buying shares of stock is a direct investment in a company. If the company does well, the price of its stock will rise and if it falters the stock price usually drops. This is considered a risky way to invest, since there is no way to predict how a stock will perform in the future. Stocks are bought through a broker or online brokerage firm. The cost to execute an order to buy or sell stock should be free! If it isn’t, keep searching for a brokerage that provides free trades.

2. Mutual funds: A mutual fund is a “basket” of securities that is professionally run and managed. Mutual funds typically seek to provide an array of investments rather than pooling all of their funds into a single company, industry, or type of security. Mutual funds can be made up of dozens of different types of investments. If one company in a mutual fund portfolio does poorly, other investments can balance out the loss so the overall fund takes less of a loss. Mutual funds are managed by investment professionals who charge a fee for their service. Management fees for mutual funds can run anywhere from .25% to over 2.5%.

Investing is an inherently risky process, so start by considering your tolerance for financial risk. Market-based investments rise and fall throughout every trading day. Will you be watching the markets constantly and stressing out over every dollar lost? Or are you comfortable with occasional check-ins?

If you have a high tolerance for risk and are looking for a high rate of return, individual stocks might work for you. If you want to mitigate your investment risk and still see solid returns, focus more on mutual funds. Remember that wealth-building gains are usually seen over a long investment horizon – think 20 or 30 years. When choosing which stock or which fund to invest in, don’t focus too closely on the year-over-year or even five-year return results. Look at the longest time frame possible and see if those results fit with your long-term goals.