Ask the Fool
Is Adding Stocks Worth It?
Q I am invested in a range of mutual funds. Is it worth adding some individual stocks to that mix?

- B.W., Vail, CO

A Individual stocks can indeed boost your portfolio's performance, but they can also hurt it if you haven't taken the time to learn how to evaluate and choose them carefully. For most investors, broad-market index mutual funds are best, delivering returns that roughly match those of the market.

Still, you can aim to beat the market by investing in individual stocks. They can counteract the extreme diversification of most mutual funds. If your fund is invested in 200 different companies, your money is spread very thin across many holdings. If one

of them doubles in value, the effect on the fund's value will likely be fairly minor. But if you've invested, say, 5 percent to 10 percent of your money in a single stock and it doubles, it will boost your bottom line in a noticeable way. (Though if it falls, there will also be a noticeable effect.)

For many people, a good compromise might be to invest the bulk of their money in one or more broad-market index funds (such as one based on the S&P 500) and to invest in a few select stocks on the side. Just be sure to look for companies with rising revenues and earnings, increasing cash, little to no debt, strong competitive positions and attractive prices. Vanguard, at www.vanguard. com and 877-662-7447, has many terrific index funds. Learn more at www. fool.com/mutualfunds/mutualfunds. htm.

Q What's business "shrinkage"? - A.K., Maryville, TN

A It's the routine loss of inventory, such as through accidental breakage or theft. Shoplifting, for example, shrinks many retailers' profits significantly.

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