Benefit of investing in individual stocks vs. buying a mutual fund

For most people, mutual funds are an easy way to invest in the stock market. They give you diversification, and free you from spending an inordinate amount of time worrying about your investments. (That's what the mutual fund manager is for.) And they do this at a fairly low price. Expenses at solid, well-run mutual funds can be less than 1.5% of the assets invested, and substantially less than that if you go with an index fund. However, mutual funds are not the only, or necessarily the best, way to invest for the long-term.

Owning individual securities may be beneficial, if you have the time, interest and expertise to handle your own investments. If investing in individual securities appeals to you, you will need sufficient assets. I estimate that it takes a minimum of $25,000 if you want to develop a diversified portfolio on your own—and $50,000 may be closer to the mark. You need that amount to buy shares in at least 10 or 12 different companies to gain sufficient diversification. If you go this route, you are, in essence, creating your own mutual fund, albeit one that is unique to you. That can be a good thing.

But the question to ask yourself is: “Do I really want to go through all this effort to reinvent the wheel? After all, there are close to 10,000 mutual funds out there, and I can probably find one that suits my needs pretty closely.” Still, if you like the idea of doing it yourself, then make sure you do these three things:

• Diversify

• Pick the best company in the category, and not the one that is necessarily trading at the lowest price.

• Use the deepest discounter you can find—and that you like—when buying your stocks Then, enjoy playing fund manager.