New investors: Are mutual funds or stocks the better route?
Q. I’ve never invested before. How much money do I need to start picking stocks, or should I use a mutual fund?
A. We’re so glad you asked us to help you on this journey, which can surely be confusing.
And with thousands and thousands of stocks and mutual funds out there, making a choice can be hard.
If you’re just starting out, investing in mutual funds can offer the right solution and access to help you begin an investment program, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna.
“With investment minimums of only $1,000 or less, mutual funds can offer easy access for beginner investors and some basic level of diversification,” he said.
Some funds have even smaller initial investments if you also sign up to automatically add funds to your account on a monthly basis.
“Mutual fund investors typically don’t need to do any stock research or other ongoing homework,” he said. “They simply invest and let the fund managers do the rest, and many investors feel that the time this saves more than justifies paying the management fees.”
Stocks, on the other hand, are for you if have more investment experience under your belt because you can fine tune your portfolio strategy in ways you simply can’t with funds, Meckler said. This more sophisticated approach also comes with higher minimums than funds.
To effectively invest in individual stocks, Meckler said, you need enough money to create a diversified portfolio of stocks, typically a minimum of 10, with a reasonable investment in each.
“Typically if you want to buy individual stocks you would need at least $10,000 to initially invest in at least 10 companies, so if one particular company does poorly it doesn’t have a devastating effect on your portfolio,” Meckler said. “If you’re unable to do that right away, I’d recommend starting with mutual funds.”
Being a good stock investor requires time and discipline. You must be willing to spend the time to research potential stocks to buy, and you must have the discipline to buy stocks that are likely to make sound long-term investments, he said.
Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.