Why Invest In No-Load Mutual Funds
“Compound interest is the greatest mathematical discovery of all time.” Albert Einstein
Fact: As we baby boomers come to grips with the idea that we might actually have to take care of ourselves in retirement, more than $830 billion has flowed into stock mutual funds over the past five years alone. Why have mutual funds become the investment vehicle of choice and what do these investors know that can benefit the rest of us? This article outlines the benefits of owning mutual funds as the vehicle of choice in achieving your investment goals.
Overall Strategy
The key to investment success is earning a good return over a sufficiently long period of time. As Albert Einstein said, “compound interest is the greatest mathematical discovery of all time.” Consequently, the first step to winning in the market is simply not losing by speculating on a few individual stocks. That’s where mutual funds come in. A mutual fund is a diversified portfolio of stocks (the typical equity fund holds roughly 120 different stocks), bonds or other securities run by a professional money manager or team of managers.
Mutual Fund Advantages
Benefits an investor can derive from owning mutual funds are as follows:
Diversification
This is perhaps the most important reason to own mutual funds as opposed to individual stocks. One of the funds I’m currently recommending, is Neuberger & Berman Partners, a domestic stock fund. When I buy one share of Partners, I’m really buying part of 79 different companies. This benefits me in that should one of these companies have a downturn, the negative impact on my investment is reduced.
Perhaps an example is in order. One of the companies Partners owns is Chase Manhattan. It comprises 1.75 percent of Partners total assets. If I were to invest say, $25,000 in just Chase Manhattan and the stock lost 5 percent of its value, my investment would now be worth $23,750. A loss of $1,250.
On the other hand, if I took that same money and invested it in the Neuberger & Berman Partners fund, and Chase lost 5 percent of its value, my investment would be worth $24,978.12. A loss of only $21.88.
As you can see, diversification reduces risk and addresses that first step to winning the investment game—not losing!
Professional Management
Mutual fund companies can and do hire the very best investment minds the nation has to offer. These people are skilled, experienced professionals who are judged by the total returns they generate, not by the number of transactions and commissions they create by selling you something. Furthermore, when these managers want to investigate a particular company, they often fly a team to the company’s corporate headquarters to meet with the CEO and other executives to gather information pertaining to the feasibility of investing in that particular company. This capability alone, generally far exceeds the resources of an individual investor and certainly of most if not all retail stock -brokers.
Low Operating Costs
Mutual funds, because of their economies of scale, pay the lowest trading costs of virtually all entities. Whereas an individual investor may pay $.50 a share to buy or sell stock, mutual funds pay only a few cents per share. Additionally, they have no incentive to churn your account like a retail stockbroker does because they make no commissions on purchases or sales of stock. Remember, they are judged on total return.
Shareholder Services
Mutual funds have gone to great extent to offer unparalleled shareholder services. Most funds offer such things as: automatic reinvestment of distributions, systematic withdrawal plans for retirees, automatic investment plans, record keeping for tax purposes and the ability to make telephone redemptions and exchanges between funds.
Safety from Loss Due to Unethical Practices
Thanks to the federal and state governments, and the Securities and Exchange Commission, the mutual fund industry is one of the most regulated and ethical industries in America. The legal structure and stringent federal and state regulations of mutual funds, offers the investor major safeguards as pertains to this highly important and popular industry.
What It All Means
Mutual funds offer the high return of individual stocks with a fraction of the risk involved.
Investing is serious business, especially when you’re working toward a goal of a quality retirement, putting a child through college, building a legacy for your heirs or striving for financial independence.
You have choices in how you’ll accomplish your goals. My advice is to firmly establish your financial goals in your mind, formulate a plan (complete with timeframes and risk acceptability) on how you're going to get there and then work your plan in a disciplined manner until you accomplish your objective.
Remember trading in and out of stocks on a short-term basis is not investing, it’s speculation. The person with the best chance of getting rich under these circumstances is your stockbroker.
Developing a long term investment plan designed to reduce risk and maximize returns though the use of No-Load Mutual Funds, is investing—investing designed to make you rich!
Invitation
If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call. I’d be happy to sit down with you to explain the options and procedures which will assist you in meeting your financial goals.
Marshall Sitarik - CFP
Ph. 407-977-3800
Just for Fun: Cows and Capitalism
Socialism: “You have two cows and give one to your neighbor.”
Communism: “You have two cows. The government takes both and gives you the milk.”
Fascism: “You have two cows. The government takes both of them and sells you the milk.”
Nazism: “You have two cows. The government takes both of them, and shoots you.”
New Dealism: “You have two cows. The government takes both; shoots one, milks the other, and throws the milk away.
Capitalism: “You have two cows. You sell one and buy a bull.”
Courtesy of George Dahl