When to Use Index Funds and When to Use Individual Stocks

Written by The Dividend Guy on March 20, 2006

If you read a lot of the media on investing, as well as many blogs devoted to personal finance and investing, there is often a debate as to whether an investor should invest in individual stocks, mutual funds, index funds, or some combination of all of them.

< ?php tla_ads() ?>My thoughts are that it comes down to how much time an individual has to devote to managing their portfolio. Just for interests sake, I threw together a little chart that I thought I might use to help in my decision making process.


Dividend Investing
Click on the image.

Basically, the more time you have, the more of your portfolio you can devote to individual equities. Monitoring individual equities takes time - you need to keep track of earnings growth (or a lack of), revenue growth (or a lack of), dividend growth (or a lack of), and other fundamental aspects of the underlying company. The more stocks you have, the more time you need to keep an eye on all of these things. If you don’t have the time or inclination to devote to individual equities, then pick a basket of internationally diversified index funds and you should do fine.

You will notice I did not put mutual funds on this list. If you have been following my blog you will know that I would much rather invest in an index fund than a mutual fund simply because the high fees that mutual funds charge. This fee is often not warranted as few exceed the market on a consistent basis. But that is just my humble opinion…


Recommended: ING DIRECT makes $aving money simple! Open your account online today and start earning 3.00% variable APY. No Fees and No Minimums!

del.icio.us| Digg| Furl| Reddit| Google| StumbleUpon| Technorati| Help|

3 Comments so far

  1. Investing Intelligently March 21, 2006 3:14 am

    I don’t see any advantage to picking stocks by oneself for the individual investor. If mutual funds cannot do better the indexes on a consistent basis I don’t see how an individual investor can, especially without spending 40 hours a week. I think factors like how much money you have is also very important for cost reasons. Also, indexing makes a lot of sense for large-caps but not as much sense for small-caps where the market is not as efficient, and therefore active management has a better chance of performing better. For better or for worse, I don’t think anyone can ignore mutual funds completely as an option for parts of their retirement portfolio.

  2. GIV March 21, 2006 10:21 am

    Safari internet browser likes the new site format MUCH more.

  3. Jose March 22, 2006 9:17 pm

    Simple decission tree, but I like it.

POST A COMMENT

If you would like to make a comment, please fill out the form below.

Name - (Required)

Email - (Required but not published)

Website - (Optional)

ENTER YOUR COMMENTS BELOW






Student Loan

www.financialwebring.com