Moving From Funds to Individual Stocks? Or Vice Versa?

Readers discuss how their vehicle preferences have shifted over time.

Christine Benz 25 April, 2014 | 8:00
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Investors often think of selecting individual of stocks as the domain of sophisticated types. Meanwhile, mutual funds are often considered the province of newbies.

But a recent Morningstar.com Discuss forum thread showcases multiple viewpoints on this issue. Although some respondents said that they had indeed transitioned to individual stocks as they became more confident in their investing acumen, others said that they've done just the opposite, moving more of their portfolios to funds and ETFs as the years have gone by. Among the reasons cited for moving to managed products were a desire to focus on big-picture issues like asset allocation as well as simplification.

Still other posters said that their "delivery mechanism" preferences had remained unchanged over the years, with some respondents saying that they'd always preferred the control that comes along with investing in individual stocks and others saying that they're sticking with funds due to ease of use.

Type A - 'I Can Build My Own Fund and Do Just Fine' 
Among the posters who said they had transitioned more toward stocks as the years have gone by was wilbodave, who likes the control of managing individual stock positions: "Several years ago, I was primarily in mutual funds, and bought a few individual stocks with leftover funds after meeting contribution limits. I realized I was buying the same kind of equities that were in the funds I preferred. I moved mostly to individual stocks, partially because it didn't make sense paying a manager to hold stocks I was perfectly capable of monitoring, and partially because I like having more control over where my investment funds are deployed."

That's also the thinking of MNFish, who has long held stocks and doesn't intend to switch: "I have been an individual stock investor since the early 1990s and started managing my accounts on my own in 2005. I think many mutual funds underperform because of the restrictions they place on themselves. I use Morningstar to get the performance and ranking of top-rated funds and then look at their top individual holdings and start there with my decision on what to buy or sell. I guess I feel I can build my own fund and do just fine."

Also citing control as one of the advantages of investing in individual stocks isKcajc1, who wrote, "I find individual stocks give me more freedom to control my investments and at age 75 [I] have time to work with them."

Yet Bill1234 disputes the notion that managing individual stocks needs to be complicated and time-consuming: "I disagree with the thought that you need to spend lots of time managing individual stocks. That is, unless you are buying very volatile shares or are trying to time the market. I've got shares that I've owned 25 years. They aren't exciting, but they keep chugging along."

Type B - 'I Don't Have the Knowledge to Invest in This Area'
But even investors who are primarily geared toward individual stocks said they use funds to fill certain niches. Wilbodave wrote, "I do hold two mutual funds, about 20% of my total--one international fund and one small-cap fund. I don't have the time, knowledge, or resources to invest in those areas on my own, so I'm willing to pay the fund managers to do it."

BMWLover employs a similar strategy, sticking with individual stocks for core positions but using funds elsewhere: "When I go outside my realm of knowledge, and the ability to do ample research, then I have used ETFs to fill that investment niche. An example of this is emerging market equities. I don't have the knowledge to invest in this area, nor do I have the time to do the research to be able to diversify that portion of the portfolio."

Type C - 'A Set It and Forget It Type of Portfolio'
Other posters in the thread said they'd moved decisively toward funds and away from individual securities as the years have gone by.

One frequent rationale for shifting toward funds was a desire to simplify the portfolio for a spouse. Win1177 has been attracted to funds for the same reason--a desire to leave a more streamlined, low-maintenance portfolio for a spouse to manage: "I am becoming more of an ETF/mutual fund investor as I age, and (hopefully) become a better/more experienced investor.... I have to consider the possibility that I could pass prematurely and leave our portfolio to my wife. Although quite intelligent and capable, she is not at all interested in portfolio management, and therefore needs more of a 'set it and forget it' type of portfolio. Over the years, most of my individual stock picks have done well, and many have such huge capital gains that it is very painful to sell them from a tax perspective. However, now that I am north of 55, I also have to be realistic and plan for her to potentially take over."

Dndhatcher's transition to funds and away from individual stocks has been driven by a desire for simplicity, as well as an honest assessment of results: "I've always had retirement accounts going into funds. With my taxable money I have made various attempts to invest in stocks and very few have turned out better than simple dollar-cost averaging into funds. As I near retirement I am shifting my portfolio into nothing but funds so it's simpler to manage and will be easier for whomever has to deal with it after I am gone."

Type D - 'They Will Let Me Sleep at Night'
A subgroup of those investors who are trending toward funds is focusing on index products to further simplify their investing lives.

"Slowly and tardily I have moved more toward total or highly diversified index funds and away from individual stocks and then from managed funds," wroteMJA123.

Zorkl55, once an enthusiastic investor in individual stocks, has also moved toward funds, especially index products: "I had taken finance courses in an MBA program, and knew the literature about market efficiency, indexing, etc. But it took the reality of the last decade or so for me to come, reluctantly, to indexing. I gradually diminished my purchases of individual stocks, even though I love reading company reports, divining underlying truths buried deep in the report, and finding great companies at bargain prices. Alas, I've neither the time for this in a busy life, nor the faith that my outcomes will exceed good funds and ETFs."

Zigzag's increasing emphasis on index funds and ETFs has been motivated by a self-assessment, as well as a desire to sleep easy: "Over the years, I have proven to myself that I am a much better mutual fund/ETF picker than an individual stock picker... While index funds will rarely move mountains, they will let me sleep at night and will give me an overall respectable return."

Type E - 'Allows Me to Dabble a Bit'
Many posters in the thread said that they're primarily fund-oriented, but they invest in individual securities around their portfolios' margins.

Gatorbyter echoed that approach, noting that holding individual stocks makes it easier to stay engaged: "I find keeping ~80-90% of my assets in ultra-low expense funds/ETFs and ~10-20% in individual stocks/bonds works best for me. The smaller percentage of individual stock investments keeps me interested in the overall market performance (a healthy thing) and allows me to dabble a bit, while leaving the larger percentage of my assets for professionals to manage."

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About Author

Christine Benz  is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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