I'm 33. Stable income, few major debts. I read that I should buy stocks at my age, and then get into mutual funds later, but how late is too late?
Mutual funds and ETF's provide both depth and width of diversification. Unless you have a very large portfolio, it is hard to achieve the same levels of diversification on your own.
It sounds to me like you did not understand what you read, at least I hope that is the case. The advice you quoted (to buy stocks now and get into mutual fund later) makes no sense for the simple reason that you can buy stocks through a mutual fund. A mutual fund is essentially a professionally managed portfolio of stocks and/or bonds and/or other asset classes. The answer as to whether individual stocks (or bonds) might be better for you depends on how much money you have to invest, how experienced an investor you are, how comfortable you would be managing a portfolio of individual securities or mutual funds, and how effectively you could select and manage the investments in your portfolio. Based on your question, I'm guessing that you are not an experienced investor, so you would probably be best off investing in a mutual fund or a diversified portfolio of mutual funds with different investment objectives such as US stocks, foreign stocks, emerging markets stocks, US and foreign bonds, commodities, etc. You can get a lot more diversification and professional management with less money to invest by using mutual funds. You might also consider consulting with (and possibly hiring a financial advisor) to help you determine the most effective way to invest based on your individual financial situation, risk tolerance, time horizon, etc. If he or she believes that individual stocks or bonds would be appropriate for you, they can help you select and manage them.
I don't think your question has been answered. There are plenty of answers already on the benefits of investing in stocks, diversification, and how mutual funds, ETFs, etc work. Honestly, to a financial advisor, the stock vs. mutual fund comment raises huge red flags and a lot of us got side tracked in trying to correct you :) However, I didn't come across an answer to your primary question: How late is too late? Chances are, it's not too late. Assuming that you plan to retire at 65-70 years old, that leaves ~30 to 40 years of time to be invested in the markets. As long as you have ~15 years or more to invest, it's okay to be aggressive (albeit in a smart investment strategy). And yes, stocks are absolutely the best investment to be in over the long-term.
I don't mind that my personal clients dabble in individual stocks, as long as it is not a significant amount of their wealth. In fact, some of my clients are rather smart and some have pretty good investment ideas. But, I always have one rule for my clients before they invest: Do you homework first before investing.
My advice? Talk with a professional first. Once you have a plan in place, save your money, invest it shrewdly, and you will be fine.
Best of luck.
Ryan Hughes Bull Oak Capital
Why limit yourself to stocks and mutual funds? Why not invest with ETFs or exchange traded funds? As the name implies you are buying a fund…or collection of stocks in the case of equity ETFs. Equity ETFs offer exposure to broad markets or individual stock sectors. The advantages over mutual funds include they trade throughout the trading day as opposed to pricing at the end of the day. Plus, ETFs are typically less costly to buy. Investing in a mutual fund can cost upwards of $40 per trade when purchased through Fidelity or Schwab. ETFs commissions are typically much lower. Fidelity actually offers 70 commission-free ETFs. Finally, and most importantly ETFs are standing up to the test of time as a legitimate investment vehicle. We look back to the ‘Financial Meltdown’ in 2008/09 and can’t recall a single ETF failing as a result of market stress. So broaden your investment universe. Include exchange traded funds (ETFs) in you mix.
Tina, there is no simple answer to your question, but a lot depends upon the size of your account and who is managing the investments. If the account is $50-$75k or less, it might be better to be in funds or ETFs. As your account approaches $100k or larger, or if it is being professionally managed, there's no reason you can't be in individual stocks. A portfolio with 20-30 stocks is, in effect, your own personal mutual fund and no riskier than any single fund.
Tina, your question doesn't really provide enough information regarding your particular situation for any of us to give you a solid answer. However, the thing to ask yourself is, "do I have the time, the patience, or the desire to research the individual companies I'm investing in?" If the answer is no, then, I would consider either a mutual fund portfolio, or using ETF's. And, if you're not willing to do the "hard work", ie research, monitoring, etc, I'd suggest finding a local professional to work with. A professional Financial Advisor can help you with education, finding your risk tolerance, and a suitable portfolio based on your personal situation and your goals.
Best of luck... Rod Miller, CFP, CLU, ChFC
There's a common approach for advisor recommendations which may have led to some confusion, and perhaps the basis for your questions.. Age, income, and debt are all factors. The other factor you left out is risk tolerance. Are you risk averse, moderate, or love risk?
Now, there is no perfect allocation but age is a big factor when looking at the amount of risk you should expose yourself to. The assumption is that a younger person has more time to withstand the volatility of the stock market. I would recommend you speak with a competent advisor to come up with a plan that suits your individual position and risk tolerance.
Should you buy stocks at your age... Definitely! But you may not want to buy them individually and will likely want to own stock through some other vehicle, like a mutual fund, ETF, or a portfolio only advisor.
Stocks, as many have stated before, are rather risky investments and expose your investment to company risk. Diversification is a well known way to reduce this risk and mutual funds inherently offer diversification but they vary greatly in composition and often include many types of instruments (stocks,bonds, etc..). You would have to read the individual funds prospectus to understand the makeup of that fund. Many advisors are now recommending ETF's over mutual funds to gain exposure to the stock market. This is because an ETF's costs are much lower than mutual funds, offer diversification similar to mutual funds, and they benefit from being exchange traded (easier to trade and cheaper to own).
How late is too late? There isn't a 'too late' in investing because your objectives will continually be changing and your financial portfolio should evolve as you do.
All investments are in the "Market" in one way or another. Without knowing you (the key to giving precise investment advice) my general advice is neither individual stocks nor mutual funds - -the former are high risk and the latter are for your grandfather. Are you familiar with the movie "The Graduate" where one of his parents' friends pulls (Dustin Hoffman) aside to tell him one special word? ("Plastics") Today, that word (actually an acronym) is ETF, the modern equivalent of open end mutual funds. If you want more homework, search the web for "Regulated Investment Companies". Best of luck.
I am going to attempt to provide an analogy that will help understand your question which is a great question and one I get and see often.
Here is the analogy
I was told that I should drink lots of fluids for my age and activity level and then drink lots of water as I get older but when should I switch from fluids to water?
A mutual fund can invest in stocks or bonds or gold or a variety of other assets. A mutual fund is not always diversified. I want to take a step back and hopefully explain a little more to help you understand mutual funds vs stocks.
Let’s start with securities. To keep it simple, let’s assume the only securities you can buy are stocks and bonds. With stocks you are “owning a small part of the company” and you are subject to the changing value of the stock. Bonds are basically buying a loan where when you provide the loan you earn interest on the bond (loan) you purchase. Generally speaking, stocks are riskier than bonds. If you have a long time horizon, you can withstand a short term drop in the stock market which in the long run, should outperform bonds. However, as you get older or closer to you goal, you are less able to wait out a drop in the stock market. This fact is where you are getting the conventional wisdom of investing in stocks for a longer time frame.
Now let’s jump into more jargon. ETFs, Mutual Funds, Closed End Funds, Managed Accounts, etc. etc. etc.
These are basically legal structures that have their own way and method of investing in securities. These investment vehicles can invest in stocks or bonds (or a variety of other securities and financial instruments but I don’t want to make this any more confusing). You then are gaining exposure to the underlying assets these legal structures are buying. All of these structures behave differently and have their pros and cons and should be evaluated thoroughly. To some extent, for new investors, these structures are more confusing than individuals stocks. So you will want to learn about the different structures and you will want to know what they invest in.
I think you are getting a lot of recommendations for mutual funds and ETF’s because for a relatively small amount of money you can purchase a mutual fund or ETF that hold many different stocks and helps diversify your risk (putting too many eggs in one basket).
As you continue your research feel free to post more questions and I am sure we can help provide more information for you.
By investing in a mutual fund you may be investing in the stock market. That said, you should only pick individual stocks if you have the time and experience to build a diversified portfolio. Picking a good mutual fund will do the the job of picking the stocks and diversifying your risk with a basket of securities.