Stocks vs. Mutual Funds: Which Is Right for You?

Question: I'm planning to invest some money in the stock market, but I'm wondering whether I should buy mutual funds or individual stocks. Which do you think is better? And in the event I decide to go with stocks, which ones do you think are really good buys now? --Monique Thompson

Answer: The stocks vs. funds issue has always been a biggie for individual investors. But the question of whether you should go it alone or turn over your money to a mutual fund manager who'll invest it for you is even more critical today, if only because this uncertain economy and volatile market make the rewards for success and the cost of failure that much higher.

Clearly, the answer will vary from person to person, depending on such factors as how much money you have to invest, how well versed you are in the ways of the financial markets and how much time and effort you want to put into your finances.

It's also clear that each approach has advantages and drawbacks. With mutual funds, you get convenience, a diversified portfolio and the security of knowing that you have an experienced stock picker working full time on your behalf.

On the other hand, you have less control over your investments - not just which ones you choose, but when you recognize gains. That can be an issue when it comes to taxes. If the fund manager sells enough shares at a profit so that the fund has realized capital gains in a given year, you'll have to pay tax on a share of those gains even if you haven't sold shares of the fund (assuming you hold the fund in a taxable account).

If you decide to buy stocks on your own, you definitely have more control over what you own and when you sell. But you've also got to be willing to devote more time and attention to your investments.

So as I see it, the decision to go with stocks or funds comes down to a realistic assessment of how much you want to make your own investing decisions and your ability to handle that responsibility. Here are three questions you might ask yourself to help you with that assessment.

Am I willing (and able) to analyze companies' prospects? You don't have to be a rocket scientist to identify promising stocks. But you should be able to evaluate a company's finances. What sort of earnings growth is it likely to achieve? What's the value of its assets? Is it vulnerable because of a heavy debt load or a weakness in its product lineup?

But even that's not enough. You've also got to be able to assess whether it's selling at an attractive price. If a company has solid earnings and an impeccable balance sheet but is so popular that it's trading at a bloated share price, buying it may be an invitation to subpar returns.

There are many ways you can develop stock-picking skills. CNNMoney's Money 101 section has easy-to-read lessons on everything from assessing stocks to putting together a portfolio. The American Association of Individual Investors also offers lots of information about stock investing [www.aaii.com/basics/] that's geared toward beginners, as does the Learn [www.weseed.com/learn/learn.html] section of relatively new site called WeSeed.

But until you at least familiarize yourself with the basics of stock investing, stick with funds (or at least keep all but a tiny portion of your money in funds).

Am I ready to devote the time and effort to monitor my holdings? As we know from recent experience, the investing world can change dramatically. I certainly don't want to suggest you need to be buying or selling stocks every time the market or the economy reverses course or the fortunes change for a company whose stock you own. But there may be times when you should react.

If a company's potential has dimmed, you may want to sell some or all of your shares and plow the proceeds into a firm that has a rosier future. Conversely, if one of your stocks has racked up such huge gains that it now represents an outsize percentage of your portfolio, you may consider selling some shares to avoid having too much riding on one stock.

There may also be times when you can turn the tax system to your advantage, say, by selling shares that are trading for less than you paid for them and then using the loss to trim your tax bill.

Keeping an eye on your portfolio and making occasional adjustments isn't a 24/7 job. But you should be prepared to spend at least a few hours a week tending to your holdings. If you're not disposed to put in that amount of time - and possibly more during periods of upheaval - then you're better off in funds, which generally require less attention.

Do I have enough money to make it worthwhile to choose stocks on my own? Here, mutual funds offer a clear advantage for most investors. By using a tool such as Morningstar's Fund Screener, you can easily find funds that allow you in for a minimum initial investment of as little as $500, even less in some cases. Many of the funds on our Money 70 list of recommended funds also require a minimum of $1,000 or less. And once you're in, you can typically add to your account in increments of $50 to $250.

If you want a reasonably diversified portfolio of stocks, on the other hand, you're talking about a much larger investment. You don't have to buy in round lots of 100 shares as was the case back in the day. But at the same tie you don't want brokerage commissions to eat up your returns. So even if you figure on paying a modest $10-per-transaction brokerage fee, you'd probably want to invest a minimum of $1,000 per stock in order to prevent your costs from exceeding 1% of the amount you invest. (Remember, you'll also have to pay a fee when you sell.) Assuming you'll need at least 20 stocks to create a balanced portfolio, you're talking about investing in the neighborhood of $20,000 to $25,000, if not more.

You can always invest smaller amounts, either initially or when adding shares. But the less you invest, the higher the percentage of your return that gets eaten up by brokerage fees.

One final tip: If you're relying on personal finance columnists or cable TV pundits for stock picks, then my feeling is that you probably shouldn't be in stocks at all.

The point to buying individual shares is that you think you bring something to the table that adds value and can boost your return - in-depth research, expertise at valuing securities, a sense of discipline that prevents you from buying or selling on emotion.

But if all you're going to do is buy on someone else's say so - in other words, substitute their judgment for yours - you'll save yourself a lot of time, energy and money by acknowledging that upfront and sticking to funds.

Building Wealth:Resist the Urge to Cash Out

Should a man keep most of his retirement money in stocks, or move it to a money fund?

After suffering through the great bear market, Matt can't help but wonder if he's doing all he can to maximize his retirement savings.

The father of 5-year-old twin daughters, Hadley and Sutton, Matt has several retirement accounts, including a 401(k), a rollover IRA and a Roth IRA. He and his wife, Jenny, have saved close to $200,000. But Matt, director of financial planning and analysis at Cox Enterprises, a giant national cable company, worries that he won't have enough to exit the workforce when he wants -- at age 60.

"The direction of the market is troubling," he says. "For months, I watched my nest egg shrink every day." In March and early April, he and other investors finally caught a few breaks.

Like many people, Matt is still worried about keeping most of his retirement stake in stocks. So, while he continues to contribute new money to stock funds in his 401(k), he's considering moving to cash the $200,000 he and Jenny have already saved -- in essence, starting a new stock-fund allocation from zero.

Matt doesn't see this as trying to time the market -- although it is. "If I miss a bounce, I'll be kicking myself," he says. Fortunately, he didn't miss the March-April rebound. If he had, he'd have missed out on perhaps $30,000 in gains -- serious money.

That's why Matt should keep his investments in place. It's natural to second-guess yourself after Standard & Poor's 500-stock index loses 57%, as it did from peak to trough. But it's unwise to redo your portfolio in a knee-jerk fashion. "It has been a tough period, but this happens every 15 to 20 years," says Don Humphreys, president of Voyager Wealth Management, in Harrington Park, N.J. "This is the worst time to be selling because we're at the bottom."

It's nearly impossible to guess market swings in the short run. If Matt were to give up, there's no guarantee he'd be better off in bonds or real estate. In fact, history shows that stocks outperform bonds over time. Even with the huge drop from October 2007 through March 2009, T. Rowe Price calculates that over rolling 20-year periods since 1926, stocks have returned 11% annually, on average. Money-market funds? Just 4%.

Matt also has time to recoup his losses. Price advises that investors close to age 40 should have 90% to 100% of their retirement kitty in stocks. Cautious advisers would say 75%. Almost none would suggest that Matt zero out his stock allocation. To gauge his plan, Matt can use the retirement calculator at Kiplinger.com.

Stuart Ritter, a financial planner at T. Rowe Price, likens Matt's desire for drastic action to that of a soccer goalie who jumps to one side of the goal to block a penalty kick. Research shows that although goalies jump 94% of the time, they'd be better off sticking to the middle. The trouble is, a "bias for action" takes over.

It's the same with investing. Unfortunately, "we don't know what the future holds," says Ritter. "To be sure of your investments, do the same thing you should do in soccer: Stay focused on your position."

Lowball Salary Offers: A Working Guide

You can prevent—and sometimes turn around—offers of stingy pay, says Liz Ryan. But first let's have a little fun defining and categorizing them.

I get lots of mail from job-seekers who want to know the perfect juncture in a job-search process for the Salary Discussion. I'm glad to get these inquiries, because nailing down a salary range is not a trivial matter in a back-and-forth job-search conversation. However, all of these folks looking to pinpoint the Ideal Time for the Salary Conversation are in great shape—they're people I don't worry about. It's the ones who decide never to have the conversation at all who scare me.

There are people on the job market who believe that if a position sounds challenging and the interviews proceed well, the job offer will have to be reasonable, too. When I have the opportunity to talk with these folks face to face at a workshop or speaking appearance, I'll ask them: "Don't you see that one of the reasons the whole process goes so smoothly, the interviewers are so courteous, and the praise heaped upon you is so rich and varied is that they're planning to give you a lowball offer?"

"You're just a cynic," they answer.

Simple Faith

Job-seekers like these believe the right answer to the question "What are your salary requirements?" is "I'm sure that whatever you offer me will be fine." These folks don't lack self-esteem, and they're not expecting to jump into low-paying positions. They simply have faith in a system of manners and protocols that, sad to say, died out long ago—or at least can't be taken for granted.

Some of the job offers going to smart and capable people today are downright insulting. I talked to a friend of mine over the phone last week. Four years ago, I hired her for a spot in my business. She reminded me about that offer.

"You offered me $43,000 a year," she told me, "and what I remember about it is that you apologized for the salary. You said that it was clear I was worth more, but that the position wasn't especially senior, but that if I wanted it, it might be a great way to learn in a fun environment. So I took the job. I remember your apologizing for not being able to pay me more in that job. I appreciated that."

"It sounds like there's a punch line coming," I said.

"There is," she replied. "Last week I was offered a job at $37,000, and by now I have seven years of post-college marketing experience and half of an MBA under my belt. The funny thing is, there was no apology for the salary. Far from it. The lady said 'There are a million marketing people on the market so you should grab this opportunity while you can.'"

Stories like hers, along with my observations on how 2009's job market is developing, have compelled me to create the Liz Ryan Salary Offer Taxonomy. Here's the rundown:

• Delightful: An offer at the top of the mental range you'd created—one that surprises you in a good way.

• Perfectly Acceptable: Pretty much just what you expected and what you feel is fair for your background.

• Less than Sensational: Slightly disappointing, because it's lower than what you believe your skills merit.

• The Frustrater: Quite discouraging, in that the job itself seems great and worth doing, while the salary is far under your expectations.

• Gobsmacked: An offer so stingy it causes your jaw to drop and your brain to say, "What kind of chump did you take me for, anyway?" It sends a flush of righteous indignation across your face and body. It's not so much a job offer, as an insult to your professionalism and experience.

What can you do if you're hit with one of these insulting job offers? You can, of course, tell the hiring managers or HR representatives where they can shove their offer, and move on. Nonetheless, you must acknowledge that the Gobsmacker could have been avoided if you had broached the salary topic earlier. It's easy to be lulled into a false sense of security when the people you're meeting seem businesslike and worldly. "They'd never try to rip me off!" you think.

Oh yes, they might, and there's nothing worse than learning the bitter truth after investing six or eight weeks in the process.

Next time, be sure to bring the topic to the table early. A second interview is the perfect time to do it. But since that won't help you if you've got one of these Gobsmacked offers in front of you right now, here are some ideas for salvaging something of value, after the shock has worn off.

• Go back to the hiring manager and say: "Thanks so much for the offer. The job seems terrific, and I'm thrilled to be moving along in the process. We've had some kind of miscommunication along the way, clearly. I'm focusing on opportunities in the $XX range, and the offer I've received is obviously way below that number. If you're set on this type of salary range, I'm not your hire, but it may make sense to talk about having me consult with you as you get your new plans under way and your new hire up to speed."

• Suggest taking the job and performing it on a 20- or 24-hour-a-week schedule if that suits you. If the manager says, "We're strictly looking for a full-time person," you can wish him or her well and get out of Dodge. The key to these alternative resolution approaches, in my experience, is goodwill. It won't help you to sound miffed or affronted. There's a big communication gap; that much is clear. Can it be surmounted? Since you didn't raise the salary question earlier, you must take some of the blame as you talk with your prospective boss. "I should have begun a conversation about salary earlier, I can see," you'll say. Resist the temptation to say "I earned more than this in 1994" or "My daughter in grad school earns this much." Don't make it a personal issue. It's business.

• Try to get the cheapskate—er, that is, the manager with whom you've had a communication glitch—to see things your way. Of course, it's doubtful that you'll be able to negotiate a full-time salary offer upward by 40% or 50%, once the lowball offer has been extended. But you can talk about a results-based bonus, ownership in the company (if it's very small), and other perks.

With job offers, the big question is: Am I going to want to work for this company? Remember that miscommunications happen, so it pays to learn how to convey our value more effectively.

But there are companies out there—my young friend and many other job-seekers have been running into them right and left lately—that don't care so much about what you've done or can do. Mostly, they're concerned with the question, "How cheaply can we hire this person?" and this doesn't bode well for you or for them.

Underemployment Compensation

Five strategies that will move you closer to your dream job

Mounting job losses continue to take a huge toll on the economy and on household budgets. But they can also have a debilitating effect on those who are employed in less than their full capacity.

In addition to the thousands who receive pink slips every month, there are those who work fewer hours than they'd like, are employed in a position that doesn't suit their skills or forced to take a low-level job just to make ends meet.

While the weak economy makes it difficult to rise out of any of those situations, experts say workers should stay optimistic and avoid desperation. No matter what your work circumstance, you can still get a fulfilling job that uses more of your talent and promotes your career even in these tough times.

Here are five strategies that can move you closer to landing your dream job:

1. Be Flexible

To get closer to that dream job, workers might need to take a position with less-than-ideal hours, or that doesn't take advantage of all of their skills, experts said.

"They need to be more flexible," said Allison O'Kelly, chief executive of Mom Corps, a staffing firm that specializes in flexible employment. "You need to think about all the things that the employer is looking for."

As a way to enter the right organization, workers might want to consider taking a job that is a bit beneath their skill level because it can set them on the right career path.

"Take it because you can prove your worth. Right now people need to take what they can get in their field," O'Kelly said.

Cynthia Shapiro, a career and business strategist based in Los Angeles, said workers should take a job that could better position them for their career later on even if the pay is disappointing.

"Sometimes people just take something and it doesn't work with their résumé," Shapiro said. "It's more important to have a title that looks decent on your résumé than the money."

If you can't find work within your industry, Walter Akana, a career strategist based in Decatur, Ga., recommended that workers capitalize on their transferrable skills, and consider other sorts of posts. Employers consider hires based on their accomplishments in prior positions, he said.

"You need to step back and do a serious assessment of your skills, your accomplishments and interests. A lot of times people lose track of what they actually accomplish for a company," Akana said.

2. Continue to Network

In addition to making sure your résumé and interview skills are top notch, networking is key to finding the right job. Don't let shyness stop you from contacting colleagues, friends and family members, taking full advantage of in-person events and the Internet.

"In any economy, perhaps even more so in a weaker economy, networking is the most valuable tool by far," said Randall Hansen, publisher of career development site Quintessential Careers. "The vast majority of jobs are through referrals."

Hansen also recommended building a network by reaching out to organizations and industry groups.

"Then once you have a network ask around if they know anyone who's hiring," Hansen said. "You should tell everybody you know that you are seeking a new job and follow job leads no matter how small they seem."

3. Show Your Spirit

While it's easy to be dispirited during the downturn, keeping perkier may be more helpful when it comes to finding full-time, fulfilling work, experts said.

"If your hours are cut or there are threats of additional layoffs, you must stay positive," Hansen said. "That reinforces that you are not one of these people who are down on the company."

If perkiness doesn't come easily, at least try to keep an overall positive attitude so that you are not at the top of the list when it comes to managers' decisions about layoffs, he said.

"A lot of times it's not about productivity. It comes down to personality," Hansen said. "If the most efficient person is somewhat of a toxic person in many cases that will be the first person whose hours are cut or is let go."

Keeping up your spirit may also put you on the right track to a better position, Shapiro said.

"If you are working in something that is a little demeaning, but it's in your current path, it's important to go to work with a smile on your face and do it with pride because you are in your industry," Shapiro said. "I've seen people take these horrible temporary jobs and seen it bloom into a real job."

4. Take a 'Survival' Job

If you aren't landing your dream job as soon as you'd like, take a lower level job to keep busy, experts said. Getting a traditional permanent job in this market is going to be tougher because the competition is so high.

"We call those survival jobs. In some cases that means working at Wal-Mart or something, but it keeps them in their house," Hansen said. "Get one of these survival jobs and then as much as possible continue job hunting."

Shapiro warned about taking an off-the-books job, noting that workers may not be able to list the spot on their résumé, and may have trouble qualifying for a variety of benefits. She added that working in a job, even one that you may feel is beneath you, can also help you get an offer for a better position.

"It makes you look much more desirable. Hiring managers all want what someone else wants -- they want to steal away that person from the other company. The longer you are unemployed the more you look unemployable," Shapiro said.

Also, working in a part-time spot, even if it means slinging lattes, can help stave off desperation, and increase your shot at doing well in an interview for a better job, she said.

"If it pays the bills while you are looking, it takes the pressure off and you are not going to have that desperation in an interview," Shapiro said. "They are not going to hire you if they get a sense of desperation. The person who gets the offer is the person who looks like the safest best for recommendation."

Workers can think about taking a part-time or a "survival" job as an opportunity to show off skills to their employer,O'Kelly said. She added that employers are still looking for part-time workers in this tough economy.

"We've been hearing from a lot of employers that they can't give permanent positions right now, but they really want to hire temporary or contract workers," O'Kelly said. "Companies are realizing that they need to get the job done even if they can't hire a full-time employee."

5. Keep Busy

If you're working less than you'd like, make sure to be productive during those extra hours, experts said.

"They should do something to show that they are actively trying to keep themselves in the job market, or keep skills," Hansen said.

O'Kelly recommended that workers focus on maintaining and building skills. Workers can volunteer, participate in industry organizations or go to school.

"Maybe there's something new that came out in your industry and it might be time to take a course. It might bridge that gap to an employer," O'Kelly said. "It makes you look proactive, and gives you the skills to come in and provide value to the employer."

Negotiating the Freelance Economy

In April 2008, Rebecca Haden lost her job when the small store she managed went out of business. A year later, she's working as many as 40 hours a week and earning much more than she did before -- even though she still doesn't have a job. Her formula? Freelancing her Web skills.

Ms. Haden, of Fayetteville, Ark., is among a growing number of professionals who are making ends meet by working on a project-by-project contract basis. Even as permanent- and temp-job opportunities are shrinking, the amount of contract work to be found on freelance-jobs sites is expanding. What's more, it's moving beyond computer-programming and graphic-design gigs for small employers to include listings from larger companies and assignments in fields such as accounting, law, engineering and sales.

Between January and March, employers posted 70,500 of these work-for-hire positions onElance.com and 43,000 on Odesk.com, which represents increases of 35% and 105%, respectively, from the same period in 2008.Sologig.com, which lists remote and on-site freelance jobs, says its average monthly postings have more than doubled to around 13,500 per month in the past year. In March, there were 750 jobs listed on VirtualAssistants.com, versus 400 in March 2008.

At the same time, the number of U.S. workers employed by temporary-help-services firms in March fell 27% to 1.8 million from the same month in 2008, according to the Labor Department.

As the recession takes hold, more employers are using freelance workers to avoid the expenses associated with hiring permanent staff, says Fabio Rosati, chief executive officer of Mountain View, Calif.-based Elance. "The power of online work is that it's immediate, cost-effective and flexible," he says.

Indeed, freelance workers are often cheaper and more flexible than temp workers, whose jobs, though short-term, tend to be full-time, subject to temp-agency fees, and bound by agency restrictions, such as limits on the permanent hiring of temps.

Mr-SEO.com, an online marketing firm with eight employees, began using freelance help a year ago to handle tasks in Web-site development, administrative services and copywriting. The five-year-old Seattle-based company hired 17 freelancers throughOdesk.com for projects that lasted as little as a few days or as long as eight months and counting. "It gives us the flexibility to expand our work force depending on client demand," says Greg Gaskill, the company's president.

Like many workers who turn to freelance positions, Ms. Haden, a 51-year-old mother of four, didn't plan to take on piecemeal work after her layoff. At first, she approached a local Internet company about a permanent job doing Web optimization -- a technique for boosting a site's search-engine rankings. It was a skill she had learned while overseeing her former employer's online store and blog. The firm wasn't hiring, but it offered her a short freelance assignment. She accepted.

Ms. Haden, who holds a master's degree in linguistics, wrote about the experience for a popular blog on Web optimization. "People started approaching me with work pretty soon after that," she says.

'I Just Do the Fun Stuff'

One gig she landed introduced her to Odesk, which, like some other contract-job sites, can monitor freelancers' work. Since then, Ms. Haden says she's landed a steady supply of Web-optimization assignments through Odesk, as well as through her personal Web site and blog. Most months, she earns more than double her previous income. Ms. Haden says the work has been fulfilling, and she has put her permanent-job search on hold indefinitely. "I get to pick and choose what I do now," she says. "And I just do the fun stuff."

Many other laid-off professionals appear to be taking up freelancing, either as a new career or as a way to weather the downturn. Freelance-job sites say membership among individuals, which is free in many cases, has risen sharply. For example, Guru.com has nearly 878,000 freelance members today, up from around 760,000 a year ago.

Freelance-job sites also say they're seeing more midsize and large employers posting assignments, and the jobs have expanded into more business functions, such as finance, manufacturing and law. For example, roughly 1,700 new jobs were added to the sales and marketing category on Elance in March, a 50% increase from a year ago. That's led to new types of contract workers, too.

Last month, Lynn Welch became one of those new freelancers when she began a 96-hour home-based consulting stint for Axsys Technologies Inc., a large, publicly traded manufacturer of infrared technologies based in Rocky Hill, Conn. She was laid off in March from a senior marketing position at a midsize technology firm and says her Axsys contract is one of four freelance assignments she's landed either through networking or Guru. She's so far earned roughly $10,000 from freelance gigs in online marketing.

Pitfalls of Contract Work

Despite her successes, Ms. Welch, who is 40 and lives in a Washington, D.C., suburb, says she still deals with some of the pitfalls that come with contract work. For example, she says she once spent several hours researching and explaining how she'd handle a potential project, but didn't get the gig. "Some [employers] want to pick your brain and have no intention of paying you," she says. Now Ms. Welch is more cautious about sharing information with employers before a contract is signed. "If they're asking for a lot of details, that's a warning sign," she says.

Sites like Odesk, Guru and Elance guarantee payment after jobs are completed in return for commissions of about 6% to 10% of freelancers' fees. But many other sites hold individuals fully responsible for billing clients and collecting payments.

There are other downsides to freelancing, from the lack of health coverage and paid time off to the need to make your own retirement contributions. Striking out on your own also requires regularly searching for and vetting potential new assignments, while ensuring that you complete on time the ones you've already secured. Furthermore, you may need to invest in equipment such as computer software and a business phone line.

Carving Out a Niche

Should you decide to take up contract work, there are ways to help ensure the process goes smoothly. First, make sure to be very specific about your skills and expertise when you fill out a profile on a freelance job site, says Kate Lister, author of "Undress for Success: The Naked Truth About Making Money at Home." Doing so will help you stand out from the competition. "You want to carve out a niche," she says.

To figure out how much to charge for your work, research the rates that experienced freelancers demand for similar services, suggests Ms. Lister. The information can usually be found in members' profiles on freelance job sites. "Look at their portfolios and ask yourself, could I produce that level of work? Could I do much better than that?" she says. After settling on a figure, Ms. Lister suggests starting out at a slightly lower rate to build a track record.

Another option is to offer to work for just a few hours at first to prove yourself, suggests Gower Idrees, founder of RareBrain Capital LP, a consulting firm specializing in high-growth businesses in The Woodlands, Texas. Since early 2007, Mr. Idrees has hired about 1,500 freelancers from Guru -- including former big-company executives, many as consultants. "I've used them in every way possible," he says.

Mr. Idrees recommends discussing potential projects with hiring managers over the phone whenever possible, rather than using email, in order to build trust and negotiate a fair pay rate. That way, a potential freelancer "can educate [the company] on what the challenges really are," he explains. Sometimes, he says, employers aren't aware just how many hours a project will require.