What's the Best Way for You to Invest?

• Email
• Share
• Print

Deciding to invest your money is one of the most important steps you'll ever take toward reaching financial security. But potentially even more critical is how you decide to invest.

No, I'm not talking specifically about which companies or industries will provide the best investment returns or which way the stock market will move next. The decision I'm talking about is more fundamental than that: whether to stick with mutual fund companies for your investments, or instead to start a brokerage account that will give you a wider range of investment choices.

The pros of sticking with funds
If you want to keep your financial life as simple as possible, then investing in a portfolio of carefully selected mutual funds can help you achieve all of your financial goals. With thousands of mutual funds to choose from, you can certainly find a fund that will invest in just about anything you can think of.

One great aspect of mutual funds is they approach investing from so many different angles. Index funds, for instance, embrace the philosophy that trying to pick individual stocks is more likely to leave your returns falling short of various benchmarks, so you're better off buying an index that tracks stocks that make up a particular benchmark, thus ensuring that you'll at least match its return. The fact that most mutual funds underperform the market averages supports this view.

On the other hand, some mutual funds have established a long track record of outperformance. So, if you want to do better than the indexes, then searching for proven fund managers can be the answer you're looking for.

With many large fund families, such as Fidelity and Vanguard, you can select from a wide variety of mutual funds using either investing philosophy. That lets you consolidate all your finances under one roof, simplifying record-keeping and preventing you from having to worry about moving money around from account to account. For many, nothing could be simpler.

Brokerage accounts have advantages, too
But the simplicity of an all-fund portfolio comes at a cost: control. With funds, you're always at the mercy of whoever's managing your money.

For instance, say you're intrigued by technology stocks. If you invested in a tech mutual fund like Fidelity Select Technology (FSPTX), you'd have enjoyed a gain of more than 50% so far this year, with megacap names Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), and Apple (Nasdaq: AAPL) dominating the portfolio.

In contrast, if you have a brokerage account, then you're the one calling the shots. If you think smaller companies like Tessera Technologies (Nasdaq: TSRA) and Expedia (Nasdaq: EXPE) are more likely to earn better returns, then you don't have to settle for the relatively tiny portion of your money that a tech mutual fund might invest in them. You can control your own destiny.

The best of both worlds
Online brokers know well the value of one-stop shopping. That's why a full range of brokers, including TD AMERITRADE (Nasdaq: AMTD), Scottrade, Sharebuilder, E*Trade Financial (Nasdaq: ETFC), and many others, offer access not just to stocks but also to a wide range of mutual funds as well.

One key factor in deciding between an all-fund portfolio versus a brokerage account is cost. No-load mutual funds typically come without any cost when you buy or sell shares, but the fund's expenses will come out of your total return. With brokers, you'll typically pay transaction fees when you buy or sell. Which option costs you less depends on your investing style and the particular investments you choose.

Whichever way you decide to go, both mutual funds and brokerage accounts can be useful tools to get you to your financial goals. Picking the option that better fits your temperament and desire for simplicity and control will make you a much happier investor in the long run.

Learn more about smart investing:

• Why you need a broker.
• Ten ways you can size up your broker.
• How to invest any amount of money.