Mutual Funds vs. Individual Securities

Mutual Funds are our choice for investments. They provide a broad level of diversification which for most individual investors is almost impossible to attain through the purchase of individual securities. It has been estimated by Jason Zweig, columnist for the Wall Street Journal, that for an investor to be well diversified, he or she would have to own stock in about two hundred and forty different companies.

In our opinion the risks associated with individual stocks and bonds outweigh what some perceive as the benefits of potentially higher returns, more control, and income tax reduction. Frankly, it’s our opinion individual investments don’t hold a meaningful advantage over mutual funds in any of those areas.

We recognize, however, that some investors are attracted to individual investments, at least for a portion of their portfolio. We can accommodate that through a brokerage service which executes trades at minimal costs. We can also provide information about individual companies, and provide comment on the tax implications of such transactions.

 

Indexed vs. Managed Funds

We generally recommend managed funds over index funds, although we use both, especially bond index funds. A managed fund has a team of stock pickers who make specific investment selections within the guidelines set forth in the fund’s prospectus. An index funds doesn’t make its own selections, but instead maintains a portfolio that closely matches the overall average for a specific stock market group, for example, the Standard & Poor 500.

The managed funds we favor have low costs, and a reasonably low turnover of its holdings. We like that the funds are guided with some judicial prudence, rather than mandatory allegiance to an index.

The managed funds we favor have generally outperformed their index benchmarks, but the margin is not so great that it couldn’t be offset if the fund had high management and transaction costs. Tax considerations should take a back seat in investment decisions, however, unnecessarily high turnover also increases income tax costs in non-tax deferred and tax free (ROTH) retirement accounts.


 

Risk, Return and Time Horizons

Evaluating an individual’s taste for investment risk is often described in terms of being able to sleep at night. Although investing psyche has to be considered, there is much more to it than that.

The best returns historically have been in stocks. Compared to low risks investments like bonds, they give your portfolio a better chance to beat inflation. You can generally afford to take the risk inherent in stock investing if you don’t see a need to use the funds for a long period of time, generally a minimum of five years.

At CIM we ask the right questions. Not just about your attitude about investing, but about your overall financial plan and goals. We walk you through the process so we can help you make reasonable investment decisions, and maintain a portfolio allocation appropriate for your particular circumstances. The allocation of a portfolio between fixed income and higher risk investments is the single most important factor in determining its performance.


 

Reallocations

An investment portfolio shouldn’t be left to run on auto-pilot. The varying performance of its assets will normally call for an annual re-tuning of allocations. The character of a particular fund can change, and as time passes, the allocation appropriate for you will change.