The recent vulnerability of major tech stocks and US indexes has highlighted the trials and tribulations of trading shares in the current climate, with the Dow Jones losing 245 points last week as companies such as Microsoft and Amazon saw their stock values dwindle.
Both the S&P 500 and the Nasdaq 100 (which are dominated by tech stocks) experienced similar losses last week, and while most firms have begun to rebound from the recent crash, it’s clear that company shares offer a challenging investment proposition in the wake of the coronavirus outbreak.
With this in mind, there may be far greater benefit to be found when investing in equity funds over individual stocks. But why is this the case, and why should you care as an investor?
Stocks vs Mutual Funds - The Key Considerations
In simple terms, mutual funds pool money together from a group of investors, with this capital subsequently sunk into a range of securities such as money market accounts, bonds, and premium stocks.
No single fund of this type has been created equal, and as a result of this, each one will have different investment objectives depending on the precise nature of an investor’s portfolio.
Money managers such as Downing’s Anthony Eaton are responsible for each individual fund, with this particular example offering access to more than 150 equity positions across a raft of global markets. Funds also generate income for investors by allocating assets from within, while their diverse nature offer unique opportunities to profit (we’ll have a little more on this later).
In the case of individual shares, buying stock affords you a share of the underlying corporation. This opens up two potential revenue streams; in the form of a recurring dividend payment (which are paid from company profits) and the potential sale of shares as they appreciate in value.
In most instances, you’re required to assume ownership of an individual stock, which means that the value of your investment fluctuates in line with that of the financial instrument.
So, although you can sell your stocks in a bid to optimise profitability at any given time, a sudden and unexpected price movement can leave you burdened with a devalued asset.
What are the Benefits of Mutual Funds Over Stocks?
OK we hear you ask, but what are the benefits of trading mutual funds over individual stocks?
To begin with, funds offer investors the ideal opportunity to optimise their exposure across a wide range of stocks, with the aforementioned example we referenced earlier featuring more than 150 varied equity and market positions.
This allows for organic and specialised diversification, which is fundamental to every successful and sustainable trading portfolio in 2020.
More specifically, by investing in a diverse fund that’s home to a number of different stocks across a range of marketplaces, you can optimise your chances of long-term success while avoiding the core challenges associated with trading a single share.
Mutual funds also offer instant diversification, thanks to the range of securities that are included within. Remember, they’ve been carefully formulated to represent a diverse pool of interests, while they can be accessed with minimal commission fees.
Conversely, trading individual stocks will require to pay commission on each one, requiring a much larger capital base. At the same time, it may take longer to build the same type of diverse portfolio, and this is definitely something to keep in mind as a trader.