Stocks or Mutual Funds

Investment decisions: individual stocks or mutual funds?

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The news is full of stories about the latest hot stock – a rapidly growing company benefiting from an innovation or recent market demand. Wouldn’t it be helpful to capture that growth for your investment portfolio?

No doubt it would, if one had the ability to pick individual stocks before they rise, and sell them before they drop. Achieving that, unfortunately, is a nearly impossible forecast known as “market timing.” Those who try may often find their portfolio value dropping, as they end up buying individual stocks at higher prices, and selling them at lower prices in reaction to a drop.

That challenge has led many investors and financial advisors to explore the value of investing in an array of mutual funds to build a broad portfolio, versus attempting to choose individual stocks or bonds.

The idea behind mutual funds is simple: a number of people with shared objectives pool their money so that it can be invested by professionals in a variety of securities. Each fund typically holds a selection of individual stocks or bonds, allowing you to spread your money across a number of holdings.

As The New York Times (5/12/17) reports: A new study by Hendrik Bessembinder, a finance professor at Arizona State University, demonstrates persuasively that while investing in the overall stock market makes sense, the obstacles facing individual stock pickers are formidable. It can be much less daunting to invest with diversified low-cost mutual funds.

Through mutual funds, you can access some of the more appealing features of a smart investment plan, such as diversification, liquidity, convenience and flexibility. While diversification and asset allocation do not ensure a profit or protect against loss, they can help reduce the overall risk and volatility of your investment portfolio.

There are mutual funds for all different asset classes and types of investments. Each fund generally holds a variety of individual stocks or bonds, allowing you to spread your money across a large number of holdings.

Mutual funds offer a variety of different services to shareholders, including automatic investment plans, the reinvestment of dividends, if desired, as well as quarterly statements, and semi-annual and annual reports on holdings. They allow you to focus on a long-term growth plan and worry less about choosing individual stocks or bonds consistently.

With literally hundreds of thousands of stocks and bonds to choose from, how can you possibly track and choose the “hot” ones from the declining ones? By spreading your money across several investments through mutual funds, you access opportunity across asset classes and work to manage your risk exposure. Even better, you can look at mutual fund holdings to see which ones give you access to that certain stock you’ve had your eye on.

Working with your financial advisor, you can create a customized and personal investment portfolio based on your needs and goals.

Need more insight? Let us be your guide.

Our national network of experienced financial advisors can help you create a personalized plan to help you identify financial goals and get you where you want to go in life.

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This information is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant to be a complete summary or statement of all available data necessary for making financial or investment decisions and does not constitute a recommendation.

Please note that the information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give tax, legal, or accounting advice.

This information is not meant as financial or investment advice pertaining to your personal situation. The selection of appropriate investment, insurance or planning options and/or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors.

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