| For a majority of people, mutual funds should | | | | getting lower every year—See Unit 9.) |
| be a major part of their investment | | | | Third, owning individual stocks means you are |
| portfolio--unless they have a lot of money | | | | less likely to have proper diversification. |
| and ample time to devote to investing in | | | | To diversify a stock portfolio, you need to |
| individual securities. While there are | | | | own at least 10 to 20 different companies in |
| arguments for buying stocks and bonds | | | | different industries, which could cost |
| directly, consider buying mutual funds first, | | | | thousands of dollars. For the same price you |
| or at least use them as a core holding, | | | | might pay for 100 shares of one security, you |
| because of the following drawbacks to | | | | can buy shares in a fund that owns 100 |
| individual stock and bond picking and | | | | securities. Diversification lowers your |
| trading: First, a great deal of time and | | | | investment risk—if one or two stocks |
| expertise is required to analyze a | | | | plunge, others may gain in value, offsetting |
| company—its prospects for earnings | | | | the loss. |
| growth, its performance over the short and | | | | |
| long term in comparsion to its competitors, | | | | Nevertheless, there are several circumstances |
| its debt level and creditworthiness, its new | | | | when you do not need mutual funds: If you are |
| products in the pipeline, and technological | | | | adept at picking individual stocks If you |
| changes looming that might harm or improve | | | | have at least $20,000-50,000 to buy at least |
| business. | | | | 10 to 20 stocks (depending on stock prices) |
| | | | You plan to invest in Treasury bills or |
| Second, purchasing individual securities | | | | notes. |
| involves higher transaction costs. Even when | | | | |
| you use a discount broker, the commissions | | | | In the last case, you would do better |
| you pay to buy and sell are not cheap. | | | | purchasing them directly through the Federal |
| (However, the cost of online trading is | | | | Reserve's Treasury Direct program. |