Should you buy individual stocks or mutual funds?

Advantages:

1. Diversification: Investing in mutual funds can be a way to increase your so-called risk-adjusted return. When you invest in mutual funds, you get instant diversification because mutual funds are usually comprised of a variety of instruments such as stocks and bonds, across industries and regions. A diversified portfolio is generally considered less risky than owning individual stocks since you spread your risk.
2. Lower fees: Investing in mutual funds can be a way to get access to many instruments for a – usually – relatively low price. Mutual funds typically have lower fees and transaction costs compared to the costs associated with frequent buying and selling of individual stocks, which can impact returns significantly over time. Nevertheless, mutual fund costs vary, so pay attention to each funds’ costs.
3. Professional Management: Investing in mutual funds can be a way to ensure constant, professional care of your portfolio. Mutual fund managers have the expertise and resources to evaluate companies and markets to make informed investment decisions. They monitor holdings and make adjustments to optimize performance and risk.
4. Save time: Investing in mutual funds can be a way to save time. Building a diversified portfolio takes time. Extensive experience and skills are required to research companies, monitor a portfolio, and manage risk.
5. Breadth: Investing in mutual funds can be a way to get access to a vast amount of investment opportunities. This enables retail investors to access more niche asset classes that would otherwise be unavailable to them. These niche asset classes have distinctive sources of potential return, risk, and performance drivers. This provides better diversification throughout the economic cycle and also the opportunity to tailor a portfolio by aligning it with investors’ preferences and needs.

In addition to these advantages over, mutual funds can be chosen based on third-party providers' ratings such as Morningstar. Such ratings help investors assess a fund's past track record (risk-adjusted return) relative to its peers.

Disadvantages:

While mutual funds have some advantages compared to investing in individual stocks, there are also challenges that are necessary to consider.

1. Lack of control: If you invest in mutual funds, you give up control and leave the decision to select, buy and sell specific stocks to the fund manager, which may not always match what you would prefer. You are also stuck with all of the fund's holdings.
2. Lack of transparency: Mutual funds do not disclose their holdings and trading activity in real time. Generally, they report holdings on a quarterly basis up to 60 days after the quarter end, so you won’t be able to see exactly how your money is being invested at any given time.
3. Underperformance: While mutual funds aim to optimize returns and risk, it is no guarantee they will outperform the overall market or match the returns of a well-selected portfolio of individual stocks. Fund managers, like any market participant, can make poor choices or miss opportunities at times. Despite the glossy marketing material, make sure to do your homework before selecting the mutual fund you want to invest in.
4. Order execution: For most markets, mutual funds trade once a day after the close of the market. This limits the possibility for swift reaction when big market movements occur.

Conclusion:

Mutual funds are interesting for many investors and have distinct advantages compared to stocks. However, this doesn’t mean that an investor cannot add both to their portfolio. Mutual funds and individual stocks are not mutually exclusive; it's more a matter of personal preferences, taking into account how much experience and time you have.

Also, as highlighted above, mutual funds have disadvantages compared to investing in individual stocks. It is important to be aware of these and decide whether they outweigh the advantages.