Decisions Decisions.

CONFUSED ABOUT WHETHER YOU SHOULD BE INVESTING IN STOCKS OR MUTUAL FUNDS? READ ON.

A SELF-PROFESSED AGGRESSIVE INVESTOR FOR THE PAST TWO YEARS, JOSEPH SMITH CAN ENJOY hobbies such as traveling around the globe or spending precious moments with his national champion show dog, The Oakland, California. resident just returned from a trip to Honduras compliments of the cash he made from his investments. Says the 51-year-old freelance photographer: "The market has given me total freedom over my time, allowing me the option to pretty much choose what l want to do."

Smith is not pressured to use his camera to pay the utilities or cover the mortgage on his home, valued at $1 million, that he and his wife, Janis, just bought from a National Basketball Association star. How has he done it? Through shrewd portfolio building.

Although he has mutual funds. Smith prefers individual stocks as his long-term investment vehicle. He believes equities offer him a much higher return. The Smiths have become such successful investors that they have become "platinum" members of Charles Schwab & Co. Inc., a status that requires $1 million or more in personal assets and 48 commissionable trades a year. That's quite a leap for Smith, who began investing after discussing stock opportunities with one of his fraternity brothers while working out at the gym one day.

Decisions, decisions. In order to get the best returns, many investors ask whether they should plow their dollars into mutual funds or individual stocks. Of course, the selection process requires more than just casual conversation. The nation's red-hot economy prompted the Federal Reserve to raise interest rates six times since last June, making for a volatile climate as investors watch the slow retreat of this record-shattering bull market.

So how do novice, conservative, or experienced investors choose? Basically, it depends on several key elements: your risk tolerance, the potential tax liabilities, your need for diversification, and how much money you can spend comfortably and still pay the bills if the market tumbles.

Experts like Weslia V. Echols, a financial advisor at Prudential Securities in Detroit, says it depends on an individual's financial objectives and their personal situation. Factors may include cash flow: the preference for hand-holding while making investment decisions: the desire to buy or sell stocks independently; and the time frame to meet a particular goal, such as buying a home or developing a retirement fund. Though there are no clear-cut answers regarding your choice to buy stocks or mutual funds, the following examples will help you weigh the pros and cons, and may serve as a guide in picking the right investment vehicle.

THE CASE FOR FUNDS

Peter W. Johnson Jr., a registered investment advisor who produces GreenJungle.com, an educational Website for investors, maintains that the factors influencing file choice between mutual funds and stocks include risk, costs, convenience, and tax ramifications. Many mutual funds offer investors instant diversification and allow them to get started with as little as $1,000 or less. In comparison, stocks can be purchased for the price of a single share, although brokerage commissions--which can average $30 to $50 per transaction--make buying less than $1,000 worth of stock generally impractical.

Funds help investors avoid the biggest risk of investing: lack of diversification. Compared to stock, mutual funds reduce volatility. That is, the investment's value is not likely to rise or fall as widely as an individual stock's. This might encourage investors to continue investing, a major key to success.

Another consideration is an investor's time. Most people are too busy to become stock experts or market gurus. Johnson says mutual funds offer investors the expertise of professional fund managers whose performance record is public information. It's also easy for investors to keep track of their portfolio, and some mutual funds offer extra amenities, such as money transfers and telephone customer service.

THE CASE FOR STOCKS

In terms of profits, Johnson says individual stocks typically are more volatile than mutual funds, but they also offer greater return potential. He suggests that Bill Gates, founder of Microsoft (Nasdaq: MSFT), would not be as rich as he is today if he had invested his money in mutual funds rather than in his Seattle-based computer software company's stock.

But there are no guarantees with stocks. Sue Stevens, director of financial planning at Morningstar Associates L.L.C., the registered investment advisory business of Morningstar Inc. (www.morningstar.com), says that during the past year, 351 of the stocks her firm tracks have returned more than 200%. Only one U.S. mutual fund performed as well. But consider this: of the 5,527 mutual funds Morningstar follows, only 16--fewer than 1%--lost more than 20% of their value over the past year. In contrast, of the 7,651 stocks Morningstar follows, 2,514, or 33%, had negative total returns of more than 20%.

Fees and taxes are other factors investors should look at before selecting mutual funds or stocks. The operational expenses of a mutual fund are deducted from its assets, which can significantly reduce the total return. In contrast, stocks don't carry these costs, which can range from 0.1% to 2% or higher. GreenJungle.com's Johnson says even no-load mutual funds--those with no upfront costs--have expenses tied to the fund's marketing efforts as well as management fees.

Another downside: With mutual funds, investors can't control the timing of capital gains distributions or the taxes on those distributions. Why? It's up to the fund's management to decide when to sell and buy stocks within the portfolio. But he also said that there are some funds, including index funds--those tied to the performance of such indices as the Dow Jones industrial average, the Nasdaq, and the Standard & Poor's 500--that minimize taxable distributions by having less frequent sales of stocks within their portfolios.

Stevens of Morningstar Associates maintains that tax implications are among the strongest reasons investors should consider purchasing individual shares. She says stocks can be used at year-end to cancel out gains elsewhere in your portfolio, and investors can control when they realize gains or losses depending when they decide to sell. But she warned that even with individual stocks, investors should invest for the long haul and avoid such activities as day trading, which can result in staggering tax consequences.

THE ART OF PORTFOLIO BUILDING

Joseph Smith has been successful in building a diversified portfolio. He has eight different accounts--including one long-term portfolio for stocks, another one for mutual funds, and an IRA--at Charles Schwab for himself and his wife. Smith, who is investing for his retirement, owns 25 individual stocks. Qualcomm (Nasdaq: QCOM), Triquint Semiconductor Inc. (Nasdaq: TQNT), and JDS Uniphase Corp. (Nasdaq:JDSU) are among his largest holdings. He also invests in John Hancock Funds, including its small-cap and index funds.

Partial to individual stocks, he also buys mutual funds for practical reasons. He says mutual funds offer diversification and balance his stock portfolio, should one of his stock investments take a plunge. "Stocks are very volatile, and you can lose a lot fast, particularly in this environment," he says.

In fact, he may have as much as $100,000 invested in mutual funds at a given time and only realize a $10,000 to $20,000 gain in a year's time. But he is confident the fund will make money, particularly if it's well managed and diversified. But stocks, he says, come with no assurances. He recalls buying $77,000 worth of Qualcomm stock 10 months ago and realizing an $110,000 profit two months later. But since then, Smith says, the stock has dropped, and is now worth about $79,000. He cautions stock investors to be patient. "I plan to hold it for the long term and see what the value does over the next 10 to 15 years."

Smith admits that he has been able to take such large positions because of his high-earning, dual-income household. He says the market has been good, affording them the luxury to travel frequently to see their prize-winning Doberman compete at national dog shows.

FINDING DIVERSITY THROUGH FUNDS

LaTonya Boyd Edmond, a 33-year-old mother and software engineer at a small consulting firm in Maryland, on the other hand, prefers funds to individual stocks because of the diversity of their stock portfolios. She and her husband, Bobby, 35, have invested their money primarily in mutual funds for retirement as well as to pay for college expenses. The couple started investing in one of the Seligman Communications and Information funds in 1996 with $1,000 they transferred from savings. They have consistently invested $100 a month in the fund and their account is now worth just over $11,000.

The Edmonds also have established mutual funds for the college tuitions of their sons William, 8, Aaron, 5, and Kenan, 3. Those funds consist of the AIM Fund and the DEM Fund, which is managed by Baltimore-based Chapman Co., an African American-owned financial services firm (see "B.E. Black Fund Watch," Moneywise, October 2000). They purchased shares in the individual funds in 1995, 1996, and 1998, investing $75 per month for each child, and plan to increase the sums in subsequent years. Together, the funds are worth $11,000 today.

For conservative investors preparing for retirement, GreenJungle.com's Johnson likes mutual funds. But, he says, "Each investor must decide for him or herself what is most appropriate. There is no one right way to invest that fits everyone."

Dr. Lawrence Wells, a 41-year-old orthopedic surgeon from Cleveland, aggressively invests in stocks and mutual funds but seeks balance and peace of mind through diversification to offset volatility. His fund holdings include the Janus and American Century mutual funds, while Cisco Systems Inc. (Nasdaq: CSCO), Intel Corp. (Nasdaq: INTC), and Microsoft are among his stock picks.

An investor for 10 years, Wells says his portfolio has yielded him annual returns of about 12% to 15%, in step with the performance of the S&P 500. He likes the expertise he gets from fund managers. At the same time, Wells pays for advice from a broker on his other investments. But he is also educating himself about equity performance trends so that he doesn't have to rely on his broker's advice alone. He also talks about investments with his wife, a voracious reader of financial publications.

In addition to developing a consistent savings plan to finance his retirement, Wells plans to use his investments to pay for college for his two children when they reach 18.

Whether investors buy stocks, mutual funds, or both, can be determined by their lifestyles and personalities. Prudential's Echols says knowledgeable investors have enough money to research and buy the stocks of different companies in many industries to diversify their portfolios. But, she says, mutual funds are a better option for individuals with a limited knowledge of investing, a small amount of money, and a discomfort with the ups and downs of the stock market. Bottom line: Individual investors should choose investments that best fit their needs. Asserts Echols: "Your choice should depend on what's most important for you, but the key is to begin investing now, whether it's in stocks, mutual funds, or both."

For Thelma and Giles Hagood of Columbia, Maryland, accumulating wealth is the goal. Over the years, Thelma has found that she can achieve her financial goals by using both vehicles. She has been investing in stocks since the 1970s and mutual funds since the 1980s.

A recent retiree from AT&T, Thelma has stashed a large portion of the Hagoods' nest egg in stocks, mutual funds, and bonds. Their investments have produced, but they have looked at further diversifying and growing their portfolio. They have done so through Charles Schwab's Signature Services, a club that requires personal assets of $100,000 and at least 12 commissionable trades a year with the brokerage firm.

To Thelma, the market can provide steady, rapid gains if an investor is risk tolerant. But the market can also be very cyclical. Says she: "Right now there is extreme volatility, but you must be willing to ride it out."

Her keys to generating solid returns and reaching their goals: "Prayer, working with a broker, and a diversified portfolio."

Tale Of The Tape: Stocks Vs. Mutual Funds

Trying to figure out where to invest your money? The table below will help you decide whether individual stocks or mutual funds are the better investment. Depending on your risk tolerance, you may want to build a portfolio of equities, mutual funds, or both.

                         Stocks                  Mutual Funds

DIVERSIFICATION     Less diversification    Instant diversification

INITIAL PURCHASE    Usually purchased in    Usually investors
                    a round lot, or 100     purchase fund at its
                    shares of stock.        minimum initial
                                            investment level, which
                                            can range from $250 to
                                            $10,000.

TAXES               You can control when    Investors can't control
                    to realize capital      timing of capital gains
                    gains or losses,        distributions or taxes
                    depending on when       on those distributions.
                    you decide to sell.

MANAGEMENT          None                    Run by professional
                                            money manager.

FEES                No additional costs     Funds can be either
                    after purchase.         load--which requires a
                                            payment of an up-front
                                            fee--or no-load.
                                            Operational expenses,
                                            including marketing and
                                            management fees, range
                                            from 0.1% to 4.5%.

RISK                Risk is concentrated    Diversification reduces
                    to the number of        risk.
                    individual stocks
                    held in your
                    portfolio

RETURNS             Possibility of huge     In many cases,
                    annual returns. In      consistent returns.
                    recent market, more     Only one fund has had
                    than 300 stocks         a return of 200% or
                    have had returns of     more.
                    200% or more.