NEW YORK (MONEY Magazine) - When putting together a portfolio, how does one decide between individual stocks and bonds or mutual funds that invest in stocks or bonds?

-- Cee Jackson, Washington, D.C.

More information on Updegrave's new book.

Ah, grappling with the big questions can be tough. Is there life after death? Why do bad things happen to good people? And, of course, am I better off investing in mutual funds or individual stocks and bonds?

Well, how's this for an answer, grasshopper? The answer lies within you.

I'm dead serious. It comes down in large part to each person's individual preference, almost like whether you prefer Coke or Pepsi, mustard or mayo, Häagen Dazs or Ben & Jerry's, although the stocks versus. funds issue also has a financial dimension to it.

As I see it, there are four key questions you must consider:

The less you have to invest, the more likely you should go with funds. Even in these days of low online trading fees, I think you would need at least $25,000 to set up a portfolio that's diversified among 15 to 20 or so different stocks.

And once you've established the portfolio, you'll still have to fork over brokerage fees each time you invest additional money. So if you tend to add small amounts -- say, $500 at a shot -- you would be giving up 2 percent of that investment to fees, even at $10 a trade. As a practical matter, I think this makes funds, many of which you can get into for $1,000 or less, the better choice for the overwhelming majority of people.

In the case of bonds, you can get away with a smaller sum if you stick to U.S. Treasury bonds and buy them directly for the government. (For more on how to do that, click here.)

If you want to buy corporates or munis, however, you'll most likely have to buy in $5,000 minimum lots. So for a bare-bonds portfolio of just 5 to 10 individual bonds, you're probably talking $25,000 to $50,000 or so. Even then you'll be paying a lot higher price for your bonds than what mutual funds pay.

Also, if you plan to reinvest the income from your bonds, you'll have trouble doing that if you own, say, $50,000 worth of bonds paying 5 percent, or $2,500 each year. The markup on such a small purchase would soak up much of your potential return. You can get into a well-diversified bond fund, on the other hand, for a grand or less, and have your interest payments automatically reinvested.

Yes, you'll pay an annual fee for a stock or bond fund, but by sticking to low-cost fund families you can keep the annual cost down well below 1 percent a year. To screen for low-cost stock and bond funds, check out our Fund Screener.

If you're going to buy individual stocks and bonds, you've got to be willing not only to devote time to research them before you invest, but to periodically monitor how well your holdings are doing. It's hard to put an exact number on this.

But if you know what you're doing, I'd estimate you'd want to spend at least a couple of hours of researching each stock or bond before you buy, so right there you're in for 40 hours or so upfront for a 20-stock portfolio, and say another 20 hours to pick 10 bonds.

After that, you probably would want to spend at least another couple of hours a week keeping track of your holdings and deciding whether or not you need to replace anything.

Mutual funds also require some time, but I think you can cut the initial time to, say, five to 10 hours, less if you go with index funds. As for monitoring funds, I think checking them out a few hours each quarter works fine in most cases.

Of course, you can spend as much time picking and overseeing funds as you can with stocks, although, frankly, I don't believe there's a lot to be gained. And to the extent paying closer attention makes you more apt to meddle with your portfolio, I think it can actually hurt by increasing the chance you'll jump into hot sectors that may be about to fade and move out of lagging investments that may be due for a rebound.

Of course, even if you have enough money and time to invest in individual stocks and bonds, it wouldn't make much sense if you don't know what you're doing. By that I mean you need to know something about how to evaluate whether a company's stock price is fairly valued compared with the firm's asset value and earnings prospects and, in the case of bonds, whether the issuer has the financial wherewithal to make good on payments and whether the bond's price and yield is competitive with issues of similar term and quality.

If you're not up to this sort of analysis, then you're not investing, you're guessing. For a look at the fundamentals you need to know for investing in stocks, click here, and for more about buying individual bonds, click here.

The hurdle is much lower for fund investors since the fund manager will be buying the securities and overseeing the portfolio. But that doesn't mean fund investors don't have to do any critical thinking at all. At the very least, you'll want to have a good understanding of a fund's expenses and its investment strategy, not to mention its level of risk and how it's performed in the past. You can learn more about how the various factors to consider when choosing funds by clicking here.

Ultimately, though, if you're going to invest in individual securities rather than funds, you've got to want to do it. If you really have little interest in doing this then you're probably not going to give it the care and attention it deserves. In which case, you're probably better off going with funds and freeing up more time for the things you really want to do.

Of course, nowhere is it written that you have to be someone who invests in funds or individual securities. There's no law against doing both. You could invest most of your money in funds and make them the core holding in your portfolio and then invest your "mad money" in individual stocks, say. Or, for that matter, you could start with funds and maybe switch to individual securities gradually as you pick up more investing experience and confidence.

In short, you've got a lot of latitude. The key is that the approach you take ought to be the one that appeals most to you and also makes sense given your finances.

Also see: How even Average Joes can retire rich

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Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."

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