Should I buy individual stocks or mutual funds?

We're all getting back to basics like friends, family and frugality. In the market, old hands are reconsidering their basic assumptions, and newer investors wonder whether anything they've learned thus far still holds.Cautious investors love companies that send profits to shareholders. Companies that pay dividends tend to be in more-stable sectors, such as consumer staples or utilities, and they pay investors through good market times and bad. And with so many of us suspicious about Wall Street, dividends are real money you can trust more than forecasts or projections.

These days, some experts say single stocks are simply too risky for most investors. The real answer depends on how much time you have. If you go with stocks, you're going to need at least a dozen and probably more. A variety keeps you diversified, so that problems in one company or sector won't wipe you out. You also need the time to understand and track those stocks; if you don't, you're speculating, not investing.Mutual funds let investors pool their resources so that a professional money manager can invest for them. The problem here is that the returns posted by most mutual fund managers trail the market, partly because of their fees. (Read "Are fund managers worth their pay?" for more.)

You also get a tax bill as they buy and sell and, hopefully, collect capital gains.
A solution is to go with index funds that invest in a broad basket of stocks such as the S&P 500 Index ($INX). The fees are lower, and you get the diversification you need. Plus the stocks are traded less often, so the tax burden is usually lower.

What's the difference between a mutual fund and an ETF?

With a mutual fund, you give your money to a fund company, which then invests it in such things as stocks or bonds. The fund's value is calculated once a day, after the markets have closed. An ETF, or exchange-traded fund, is a basket of stocks, bonds or commodities that usually follows an index and that you can buy and sell throughout the day, just like a stock. ETFs typically have lower expenses and fees, but, as with a stock, you have to pay a commission to buy them. Because you control sales, you have more control over when you'll get a tax bill for taking profits.