There is a strict divide between two schools of thought when it comes to investing for your retirement years. One camp says that you should invest in funds, such as what you will find in an IRA, 401(k), or variable annuity. The other camp says that you should focus on individual stocks. Both sides have merits, but both have drawbacks, as well.
The two big benefits of a fund is that you have built in diversity and professional management. You have someone that you are paying to make sure that your money is going exactly where it will be the most helpful to you. Some funds have higher fees than others, but if they are making you enough money, it’s often worth it. That’s why we want professional management, after all. No one will manage money for free, and it is more than worth it to pay someone to do it if they can still make a lot more for you on top of that. Let’s say you are a public school teacher and have access to a 403(b) annuity. If you have a fund that costs you 1% per year to have managed, but is returning you an extra 4% on average after that, then you are beating inflation, paying someone to do it for you, and you have nothing to worry about decision wise on your end of things. It’s a nice situation to be in.
Of course, it is possible to buy and sell individual stocks of your own and effectively manage your own portfolio. This can be quite lucrative, and a lot of people really enjoy the process of researching and executing their own investments. The downsides are many, though. For every stock like Apple and Google that makes people rich, there are hundreds of others that people lose money on. We simply don’t have the same knowledge, experience, and tools that most fund managers have. We might have some good ideas to get started on, but investing successfully is a very time consuming task, and the vast majority of people simply can’t do it because of various restrictions. If you want to learn and have the time, that’s a great thing. But the average person cannot give enough of their time and energy to be successful here.
It’s really easy to say you would never pay a 3% fee to have your money managed for you when you can do it yourself for way cheaper. Yes, you can do it yourself for cheaper, but are you going to have the same results? Probably not. A professionally managed fund is, for the average person, far more effective at growing your money, even after you factor in the cost of owning a fund. In the end, your retirement money is not something that you want to take a risk on, and going with a highly skilled professional to watch over your funds for you is more often than not the best choice.
In the end, although neither side is perfect, investing in individual stocks has more drawbacks than looking to funds. You can make a lot of money in individual stocks, and the profit rate is going to be higher if you are a professionally trained investor, but not many of us are. Instead, you should focus on your career and doing what you are best at. Instead of spending too much time away from that and losing money as you grow your investing skills, it’s far more lucrative to the average person to outsource this in the form of some sort of annuity, IRA, or 401(k).