Constructing a Common Stocks Portfolio
Historically, the greatest advantage in investing in common stocks has been the extraordinary returns to investors.
Over the past 60 years, common stocks in general have provided investors with a compounded return of about 12 percent per year.
Advantages of Common Stocks:
- Investors in individual stocks avoid the annual expense and management fees charged by equity mutual funds.
- You retain control over capital gains and losses. This is a powerful tax-planning tool that mutual fund shareholders do not have.
- The diversification benefit of mutual funds can be easily matched by individual stocks.
Portfolio diversification studies show that effective diversification can be achieved with as few as 11 stocks, and for more than 16 stocks, the effectiveness of diversification declines substantially.