When to Use Index Funds and When to Use Individual Stocks
- 4 Comment
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.
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…
4 Comments on this post
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Investing Intelligently said:
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.
March 21st, 2006 at 3:14 am -
GIV said:
Safari internet browser likes the new site format MUCH more.
March 21st, 2006 at 10:21 am -
Jose said:
Simple decission tree, but I like it.
March 22nd, 2006 at 9:17 pm -
Wade said:
To try and provide an answer to the first comment, Investing Intelligently….
One reason mutual funds stink is that they have to follow what their prospectus saids they will do, regardless of market conditions. So if it’s a tech fund, they HAVE to be long, and they have HAVE to be in tech.
The individual investor, on the other hand, can choose to go to cash, can go short, can decide to double or triple weight a particular commodity, etc. So I think we’re actually at an advantage.
January 27th, 2009 at 9:17 pm
