Stocks or Funds for 25 year starter?

[Guest shaselai]

Sorry for another post about IRAs. I am getting there with selecting a company but before that

i am curious on what most of you veterans are investing in for your IRA. Is it Stocks or Funds? I found some brief pros/cons for them and a couple of articles say that Stocks are good early on and then fall to "safer" funds when getting older. Also, my Stock friend told me that historically Stocks grow higher than funds. He also told me Energy funds is a good fund to buy.

I am 25 right now and I want to invest the maximum (4000) per year into a ROTH IRA and am wondering if I should go with investing in Stocks or high return funds. I want to figure out what the "best" way to go so i can pick my company since some might be better than others in one or the other. Any suggestions? Thanks a bunch!

[Guest allancoleman]

Suggest you go with a broad index mutual fund like the Wilshire 5000 or the S&P 500 until you progress further up the learning curve . Also suggest you do a heck of alot more reading before you jump into sector or individual stock investing . You can always shift your Roth money into something else later after you've become an expert .

Janet is right .

pax is right too .

[JanetM]

If you are just starting out, your friends advice about stocks is DEAD wrong. Look at it like this. Today you have ZERO. You contribute $4000. You will buy one or two stocks. That is very unsafe...... if you invest your $4000 in a fund you will have diversified across many stocks.

Ten years from now. Pretend you have $100,000. You could try to create diversified stock portfolio. But now you are going to be diversifed across 20-40 stocks. Depending the stocks you buy (IBM @ 97 or Windstream @14) will determine how many different stock you own. Now of course, you must watch each stock. This sort of line up is more volitile - you see each stock going up and down. The fluxuations are magnified by detail.

My advice is to pick some nice inexpensive index funds. Research the names and look for low expenses, and market or better rates of return.

[Guest shaselai]

If you are just starting out, your friends advice about stocks is DEAD wrong. Look at it like this. Today you have ZERO. You contribute $4000. You will buy one or two stocks. That is very unsafe...... if you invest your $4000 in a fund you will have diversified across many stocks.

Ten years from now. Pretend you have $100,000. You could try to create diversified stock portfolio. But now you are going to be diversifed across 20-40 stocks. Depending the stocks you buy (IBM @ 97 or Windstream @14) will determine how many different stock you own. Now of course, you must watch each stock. This sort of line up is more volitile - you see each stock going up and down. The fluxuations are magnified by detail.

My advice is to pick some nice inexpensive index funds. Research the names and look for low expenses, and market or better rates of return.

Interesting. Yeah i think i will research more on funds especially index. But Energy funds are a good buy?

[david rigby]

But Energy funds are a good buy?

Who knows? But do you really want to be taking specific investment advice from an internet discussion board? The best advice has already been given: seek out good mutual funds. If you want to invest in energy stocks, there are mutual funds that do that.

[John G]

I think you are getting a combination of extremely bad advice, coupled with you lack of understanding about what you hear.

1. Funds - this is just a mechanism. Investing in fund is like belonging to a group or club that agrees to undertake many investments. Funds can focus on bonds, money market instruments, REITs (real estate trust versions of stocks), stocks, ETFs (exchange traded funds), or any combination of these. You seem to think buying stocks vs buying funds is mutually (bad pun) exclusive.

2. Energy stocks or energy funds - who knows. Energy companies made a lot of money in the past two years but completely stunk the four years before that. If you chase after last years winners, you are not going to get good results. Often the best performing area flips to a poor performing one in the following year. For many years health related stocks (drugs, HMOs, hospitals, nursing homes) did extremely well, but in 2006 the health sector was a terrible place to invest.

3. Energy - this is a sector, just a part of the overall economy. Beginners should not to start with sector funds. Ditto on a country or region specific fund.

4. Individual stocks vs funds: point was already made by other responders. You can't own a dozen companies when you have just $4,000 in assets. But, if you buy an S&P500 index fund you end up holding part of 500 different companies across many industries. Index funds have often been glorified because of their low costs. They beat the majority of mutual funds for many years.... but not in 2006. Still, the prior advice on a general purpose (S&P500 or total market) index fund is a sound way to get started.

5. Funds tend to be considered "safer" only because of their diversification. A fund can still be a buyer of Enron... but that hurts less when its only one stock in a basket of 250 positions. When you have 100k in assets, and time to research companies, you might consider owning individual stocks. Thats probably over a decade into the future. A lot of stocks have prices in the $20 to 40 range. With 100k in assets, you could then own 14 different stocks with 200-300 shares each.

6. Buying stocks: unlike no load mutual funds, there will be commissions to both buy and sell. Expect to spend time monitoring your positions. And, consider this... you should never be buying any stock if you can't talk for 5 minutes about the company (competitors, new products, earnings, senior mgmt, growth rates, debt, etc.). You need to also spend time reading about each mutual fund you buy... although general purpose equity (aka stock) funds and index funds are easier to study.

7. I wonder if you read that stocks were good early on, but that BONDS were better as you get older. There is some logic to this statement, but note it has nothing to do with FUNDS. Stocks tend to outperform bonds over the long haul, but in any given year either might provide better returns. This concerns allocation of funds between asset classes.

8. There are two things you should focus on right now. [1] Get started with a basic mutual fund. [2] Understand that you need to learn more about investing and that you need to dedicate some time to reading investment primers and the general financial press.

If your blood boils for spending hours thinking about investing and finding "big winners", then consider joining an investment club. There are thousands of these around the country. They often meet once a month and individuals research and present there investment ideas. If you convince half the room, they may buy shares in something you found.

Time is an investors friend... don't expect a lot of "action" 'cause investing is like watching paint dry. Make you choice, then let growth, profits and American capitalism slowly increase your nest egg... about 10% a year.