Mutual Funds vs. Stocks - Which Are Better?

Agency Sales,  May 2005  by Eisinberg, Lee C

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If you've been investing for a while, you have probably been exposed to both stocks and mutual funds. And you may have wondered if one of these investments is inherently better than the other. The answer: Both mutual funds and stocks offer distinct advantages.

Let's start by looking at mutual funds. The biggest benefit of owning mutual funds is probably the automatic diversification you achieve. Each mutual fund invests in dozens, or even hundreds, of individual investments - stocks, bonds, government securities, money market accounts and more. When you spread your money among an array of investments, you can lessen the effect of downturns in just one type of asset class.

Affordability is another positive feature mutual funds provide. You can invest in many funds by contributing as little as $50 per month. On the other hand, buying individual stocks often means contributing hundreds or thousands of dollars per order.

While mutual funds do offer some benefits, stocks also offer some unique advantages. For one thing, with individual stocks, more of your money may be going to work for you than is the case with mutual funds. While you may have to pay a commission when you buy stocks, you won't have to pay the variety of fees that accompany many mutual funds - fees that can add up and erode the real rate of return of your mutual funds.

Furthermore, stocks may offer some tax advantages over mutual funds. Because you pay no taxes on your stock until you sell it, you control when taxes are due. And if you've held the stock for at least a year, you'll most likely receive a more favorable capital gains tax rate.

Paying Taxes

While the same capital gains rules apply to mutual funds, you may not be the one to decide when these taxes will be paid. While you do maintain some control, because you can sell your mutual fund shares whenever you want, you should keep in mind that fund managers are constantly buying and selling individual holdings in the hope of boosting their funds' performance. These managers don't ask if you mind all these transactions, but you will have to pay for them - in the form of taxable capital gains distributions. And you may receive these distributions even if your fund has lost value for the year.

Given these factors, should you choose stocks or mutual funds? In the long run, you're probably best served by owning a mixture of both. Just make sure you're aware of all the advantages and disadvantages.

Lee C. Eisinberg is an associate vice president and financial consultant at RBC Dain Rauscher in Phoenix, Arizona. The opinions expressed are his and do not necessarily reflect those of the firm. RBC Dain Rauscher is a member of the NYSE and SIPC. Eisinberg can be reached at (602) 508-7863, or toil free at (888) 595-4166, or via e-mail: lee.eisinberg@rbcdain.com.

Copyright Manufacturers' Agents National Association May 2005
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