Q: I have been studying the stock market for the past year and feel I am ready to start buying some stocks. I’ve 
managed to save a couple thousand dollars, but was told I should invest in mutual funds instead of individual stocks. Why?
A: Risk management. No matter how solid your research or how sharp your pencil, a couple thousand dollars is insufficient to diversify your portfolio. If you took your money and invested in a mutual fund, your $2,000 would buy you ownership in hundreds of companies. That same $2,000 would buy you only a small position in a couple of individual stocks.
Imagine one of the stocks in your mutual fund fails, going completely belly up without so much as a penny left in its coffers. The value of your mutual fund might temporarily drop, but the hundreds of solid companies remaining in your mutual fund would avert a financial disaster. Take this same example to a portfolio of two stocks and … well, the point needs no explanation.
Please understand that investing in individual stocks can be a great learning experience for all, and can be profitable for some. If the Wall Street bug has really taken hold, keep saving your money and then create two separate investment accounts. The first account should be comprised of top-performing, low-cost mutual funds, diversified across a variety of sectors and styles. The second account can be your individual stock account.
While there is a cost to owning mutual funds, brokerage commissions on frequent small stock trades can quickly eat into your profits. So trade responsibly, and let me know if you find any investment winners.
D. DRUMMOND OSBORN, CFP, is a founding partner of Osborn Wealth Management, a LaPorte-based Registered Investment Advisor, where he focuses on retirement planning and investment management. Visit him on the web at http://www.osbornwealthmanagement.com or e-mail him your questions or comments at drummond@osbornwealthmanagement.com.
