|
 Mutual
funds are, perhaps, the darlings of the "401k
generation." Mutual fund investing is amazingly simple. By
purchasing many individual stocks through a fund, instead
of just a few stocks, you spread your risk.
Furthermore, by gradually purchasing into a fund as in a
company-sponsored 401k plan, you reduce the risk of buying at
the wrong time through a process known as dollar cost
averaging.
What's even
better is that mutual funds are classified into investing
strategies like large capitalization, growth, value, bond
funds, overseas, health care, index funds and many more. Each
mutual fund has its own investing goals that are explained in
the fund's prospectus.
Given that
individual stocks have consistently proven to be one of the
best investments and that mutual funds reduce the inherent
risk, it's no wonder that mutual funds have over $5 trillion in assets.
So why
would the savvy (a.k.a., rogue) investor even contemplate individual
stocks? It sounds like the perfect investment
vehicle. Maybe. Maybe not.
First,
consider this:
-
Many
mutual funds have fees, or loads to pay for up front.
Even no load mutual funds have management fees, which range
from less than a quarter of a percent for an
index fund to over 2.5 percent for a standard mutual
fund. You pay this fee whether the fund is up 22 percent
or down 56 percent.
-
You have no control over
how often a fund manager sells stocks, but you have to pay the capital gains.
It's not uncommon for a mutual fund to have a 100 percent turnover
of its portfolio. The IRS
and the government must get a kick out of mutual funds
with high turnover rates; you, on the other hand, may end up owing
taxes even though your fund lost money for the year.
-
It's even
difficult to keep track of your mutual fund’s stock holdings and
performance. Mutual funds are only required to
report their holdings twice a year, although most of them report on
a quarterly basis. Do you know what your fund
manager is buying and selling on a daily basis? How overvalued is
the fund’s portfolio? Did your fund manager buy a million shares
of Subsurface Conductive Aeronautical Materials (ticker symbol:
SCAM)?
What should the sage
investor do?
If you're in a
company-sponsored 401k or similar plan, try to select funds that
minimize turnover and that have low fees. An index fund should
certainly be considered as part of your portfolio, because of the
low fees. An index fund simply mirrors one of the major indices,
such as the S&P 500 or the Russell 2000. Vanguard Mutual Funds is a pioneer in the low cost index funds;
however, most large mutual fund companies now offer index funds.
Better yet, create your own mutual fund by
finding a discount broker such as TD
Waterhouse, Schwab, Fidelity,
E-trade,
Scott Trade or others. Determine your aversion to risk and select at
least 10 to 12 companies in different business sectors. Use
dollar cost averaging to gradually
purchase these stocks and plan on holding them for several years (at
a minimum, they should be held for one year to minimize capital gains
taxes). Selecting stocks can be an entertaining and educational
adventure.
Successful investing follows common
sense! For more
information on how you can create your own mutual fund and, in
the process, become a Rogue Investor, click on
the link below…
|
