Safer: funds or stock?

Q

Are mutual funds safer than stocks? — A.T., Madison, Indiana

A

They generally are because investments in mutual funds are spread across many different holdings (such as stocks and/or bonds), reducing the overall level of risk. A single company in which you’re invested could end up going out of business or having its stock fall sharply, but it’s hard to imagine all the holdings in a mutual fund going out of business simultaneously.

Mutual funds can and do see their values drop, though: Some funds are more volatile than others. (Some, for example, might hold only energy or financial stocks, while others may hold a wide variety of industries.) Overall, funds managed by active stock-pickers tend to underperform simple, low-fee index funds.

Remember, too, that with individual stocks, if you keep up with your holdings’ financial reports and news coverage, you’ll reduce your chances of being surprised by bad news.

Q

What’s the ideal number of stocks for me to own? — M.H., Panama City, Florida

A

If you’re not willing or equipped to keep up with your holdings, the right number is zero; you’ll be better off in a low-fee stock index fund. Otherwise, between eight and 20 is a reasonable range for most people.

The more stocks you own, the more work you’ll have to do to keep up with them all. With 50 companies in your portfolio, you’d have 200 quarterly and annual reports to review each year! Meanwhile, owning too few stocks can be risky.

Be sure to focus your money on your best ideas: The companies you believe hold the most promise. Why invest in your 21st- or 37th-best idea?