When to Invest in Individual Stocks

For most people, mutual funds are the 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 should be less than 1.5% of the assets invested, and substantially less than that if you go with an index fund (or funds), something we consistently recommend.

However, mutual funds are not the only way to invest for the long term. Owning individual securities may be the way to go, if you:

a) Have the time, b) interest, c) and expertise to handle your own investments.

If investing in individual securities appeals to you, you will need one more thing: sufficient assets. Our best guess is that it will take a minimum of $50,000 to develop a diversified portfolio on your own. And you may need upwards of $100,000 to do the job well. You need that much money because you are going to have to buy shares in at least 10 or 12 different companies to gain sufficient diversification.

Of course, if you go this route, you are in essence creating your own mutual fund, albeit one that is unique to you. Thats a good thing, of course.

But the question to ask yourself is: Do I really want to go through all this effort to re-create the wheel? After all, there are close to 10,000 mutual funds out there, and I will probably find one that suits my needs pretty closely.

If the answer is yes:

Make sure you are diversified.

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 -- in buying your stocks.