Stocks vs. Funds

Q I have mostly individual stocks in my IRA account. Is that reasonable, or should I stick with mutual funds instead? — T.N., Elyria, Ohio A It depends. Mutual funds offer convenience and instant diversification. They can also expose you to industries or regions you don’t know very well, such as the international arena. (If you invest in mutual funds, favor those with low fees and talented managers, or just stick with low-fee index funds such as one that tracks the S&P 500.) Carefully selected individual stocks, meanwhile, can deliver bigger returns than most mutual funds can, but that’s far from guaranteed. Plenty of stocks don’t perform well.

For maximum simplicity and market-tracking performance, just use inexpensive broad-market index funds. If you want to try to top that performance, you might park a portion of your portfolio in some carefully selected managed mutual funds and/or individual stocks. Healthy and growing dividend-paying companies can be powerful contributors to a portfolio, and dynamic smallcap companies can come through for you, too.

You can learn more about investing in stocks and funds at fool.com and morningstar.com.

Q I own a bunch of dividendpaying stocks, with dividend yields ranging from around 3 percent to nearly 10 percent. The underlying companies all seem to be in good shape, so should I move all the money into the higher-yielding stocks? — P.G., Naples, Florida A Look beyond yields and focus your money on the most promising investments you see. A company with a stock yielding 7 percent might be growing very slowly, while another, with a 3 percent yield, might be growing more rapidly and significantly boosting its dividend each year. After some years, the second company might be giving you bigger payouts.