Individual Stocks vs Funds

Individual Stocks vs Funds

November 20, 2023

A question that I am often asked, especially in the early stages of working with a new client, is what stocks that I recommend. Typically, the people that ask this are looking for the next big idea, such as the next Amazon or Apple with the hopes of earning a return that is much larger than the market provides. Sometimes they of know someone or have read stories about someone that invested all of their money in a stock like this before it was well known and then made a fortune. The thing that I always try to convey to people that ask this, is that those stories are extremely few and far between in reality. In days gone by, it was common for people to seek out the “hot stock ideas” as a means for investing their capital. In current days with the easy access to low-cost mutual funds and exchange traded funds, it is my personal belief that the majority of investors are far better served to utilize those options rather than try to invest in individual stocks.

In today’s investment world, there are A LOT of mutual funds that are actively managed, meaning they attempt to outperform the market. With active funds, there is a manager or a team behind the scenes that is attempting to find the best stocks to invest in. These people typically have lots of education, experience and access to all the information that they would need. Data has shown that despite all of these things in their favor, these managers typically UNDERPERFORM the market rather than outperform as they intend. The background data on this is very easily accessible with any Google search. Therefore, the question I tend to ask others is: if the people who have all the education, experience, resources and time to find all of the very best stocks to outperform the market are still typically unable to do it, why do you think you can?

Data has shown that investors may be better off utilizing low-cost funds to invest their money rather than individual stocks. These funds will typically keep pace with the market (or benchmark that they track) better than any individual stock. They also offer more diversification since the investor is minimally exposed to any risks that are specific to an individual company.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.