Advisors Offer Tips On Mutual Fund Investing

There is a disconnect between return in relation to volatility when individuals buy individual stocks, he adds.

Garry recounts a former co-worker whose husband was one of five analysts on a large fund and seemed to work around the clock at his job. He says that it is “ludicrous” to think that a consumer can educate themselves on the Internet and then think they can beat that kind of effort.

Doug Taylor, a certified financial planner with Taylor Wealth Management, Torrance, Calif., says that when a client insists on investing in an individual stock, he recommends putting aside a small amount, perhaps $10,000 to $15,000 out of a portfolio which he dubs “Las Vegas money.”

Mutual funds can provide diversity to money in 401(k) funds that might not have the same diversity of fund types, he says.

Diversity is a major reason to use mutual funds, adds Kevin Brosious, a certified financial planner with Wealth Management, Allentown, Pa. He says that he reminds clients that have a lot of money invested in individual stocks, often company stock, of Enron and what happened to those workers who were heavily invested in that security.

There is no sense in investing in a security with accompanying business and market risks when a client can diversify away that risk by investing in a mutual fund, he adds.

When a client insists on being in a particular security, Brosious says that he limits the holding to no more than 5% of the total portfolio.

“We feel comfortable with a mutual fund as the foundation tool in an investment,” says Jeffrey Golden, a certified financial planner with Circle Advisers, New York.

And, he says that better quality of rating services for mutual funds as well as disclosure about funds following an industry shakeup have made it easier for a planner to perform due diligence.

He says that disclosure makes mutual funds a more appealing investment than hedge funds.

Managed no load funds are funds that Golden says that he will consider for clients rather than index funds. He says that he believes that the fees are low enough and there are enough funds that can outperform an index fund.

He says that he favors mutual funds over exchange traded funds because ETFs are often a slice of the broader market focusing on areas such as emerging markets or on commodities. They are more analogous to sector funds, he explains.

When a client wants to hold individual stocks, Golden says that he limits the “play” part of the portfolio to 2-3% of the total portfolio.

What he does see is the need to have some investment in international equity funds with a range of 15-20% and for the more aggressive client, up to 25% of the portfolio, a common holding.

As a larger percentage of the value of the world’s securities comes from outside of the U.S., the use of international funds for diversification will change, Golden says that studies suggest. To reduce correlation between domestic funds and international funds, Golden says that it may be necessary to further dissect international funds to see how portfolio managers are investing in order to minimize diversification.