INVESTING MONEY GUIDE
INVESTING MONEY GUIDE
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INVESTING ADVICE
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:: MUTUAL FUNDS >> Articles >> More Links
There are many reasons why I feel you should be trading mutual funds rather than individual stocks. The most important reason is the diversification that Mutual Funds and Exchange Traded Funds (ETF) provide. When you are holding an individual stock, you are exposed to large losses if there is any bad news from the company or a similar company in the same industry. Just take a look at the following headlines from “TradingMarkets.com”:
:: Amazon.com ( AMZN) Q2 Earnings Fall, Miss Estimates; Boosts FY06. AMZN shares
plummet over 22% (7/26/06)
Were you holding any of the above stocks? These are not small, “fly by night” companies. These companies are probably familiar to everyone. Nevertheless, stock holders in the above companies saw their portfolio values drop significantly in this news driven market where even a slight miss to analyst expectations can cause a stock to drop precipitously. I’ll provide some additional examples later, but I think you get the point. Mutual Funds and Exchange Traded Funds can also drop in price but by only a small amount due to the diversification afforded by these investment vehicles. When one or two of the stocks in the mutual fund portfolio drop in value, it is likely that some of the other stocks will be going up which further mitigates against huge drops in portfolio value. For the balance of this discussion I will use the terms Mutual Funds and Exchange Traded Funds interchangeably. There are very similar in structure since both Mutual Funds and Exchange Traded Funds hold a large number of individual stocks – often this can be over 100 stocks within one mutual fund. The main difference is that Exchange Traded Funds trade on the major stock exchanges just like a stock. You pay a commission to buy and to sell, there are no minimum holding periods, no early redemption fees, they are priced continuously throughout the trading day, and they can be sold short. Now let’s get back to some other advantages that mutual funds provide over individual stocks: DIVERSIFICATION If you have limited funds to invest, you will not be able to buy very many shares of a single stock. Also with limited funds you can not buy very many stocks to diversify your portfolio. By investing in just a limited number of stocks, there is no way to get good portfolio diversification. With an individual stock you are exposed to the possibility that one of your stocks could get hit by bad news and then plummet in price. It takes a long time to recover from on of these massive hits. Here are a few more examples:
:: Whole Foods ( WFMI) Q3 Profit Up But Sales Fall Shy Of Street View ( full story). WFMI
shares drop by over 11% in today's session. (8/1/06)
There is a small management fee built into the pricing of mutual funds. However, the management fee is a small price to pay for all of the advantages of investing in mutual funds. PROFESSIONAL MANAGEMENT A skilled professional does all of the work for you. Mutual Funds managers spend every day determining which stocks to buy and sell. They have real-time access to every stock around the world. These managers work for companies where teams of research analysts examine quarterly and annual reports, interview company executives, visit factories and review market share trends. These analysts get to know the companies on a comprehensive basis. The mutual fund companies also employ technical analysts with massive computer resources to avoid buying stocks when they are over-bought from a technical standpoint. There is no way an individual investor can compete with this level of sophistication. ECONOMIES OF SCALE Mutual Funds are able to take advantage of the size of their buying and selling size to reduce transaction costs. This translates to a savings for the individual mutual fund investors. This enables the individual investor to diversify without having to pay numerous commission charges involved in buying 15 to 20 individual stocks needed for diversification. Speaking of diversification, here are a few more “horror stories”:
:: Penn National Gaming ( PENN) Q2 Net Profit Surges; Lifts Full Year EPS Forecast;
President And COO To Resign ( full story). Shares of PENN drop over 10% (7/27/06)
DIVISIBILITY Many investors have insufficient money to buy round lots of securities. If someone only has $500 or $1,000 to invest, it is often insufficient to purchase an individual stock, especially after deducting commissions. Investors can buy mutual funds or add to their existing mutual fund holdings with a very small amount of cash to invest. This enables investors to keep their money working for them. With mutual funds, investors do not have to hold an even number of shares but can hold fractional amounts as well. HOW DO I GET STARTED IN INVESTING IN MUTUAL FUNDS AND EXCHANGE TRADED FUNDS At this point you may be saying to yourself; “Okay, I am convinced. But how do I know which mutual funds to buy, when should I buy them, and when should I sell them?” This is where I can help you. Some people purchase a mutual fund and then hold it for many years. This approach to investing can be thought of as the “Buy, Hold, and Pray” philosophy of investing. My approach is quite different. I want to buy only the very best Mutual Funds and hold them only as long as they continue to perform better than other alternatives. I invest my own money in every one of my Mutual Fund and Exchange Traded Funds trading systems. I subscribe to several advisory services to keep my universe of possible investments up to date. I then utilize four different pieces of technical analysis software to determine which funds to buy, when to buy them, how long to hold them, and when it is time to sell. I employ a strict stop loss and profit-protect methodology to keep my losses small and let my profits run. My investment approach is biased to the conservative side and can basically be thought of as an upgrading strategy. I want to constantly upgrade my various mutual fund holdings so that I am holding the best mutual funds available at any given point in time. My subscribers mirror my own buying and selling. Whenever I buy or sell one of my holdings, I send my subscribers an email telling them exactly what I am doing, why I am doing it, and when I am plan to make the trades. I do the work so you don’t have to. And, importantly, it will take you less than 30 minutes per month to make the trades with your on-line broker. You can learn more at my website at: http://www.reboundtrading.com/ . My goal is to double my money in 3 years. Currently, the combination of my Mutual Fund Trader and Rebound ETF trading systems will enable me to accomplish this goal. If you would like to join me in trading one or more of these robust systems, I would be delighted to have you as a subscriber. Just click on the “Get Started Now” button on any of my various Trading Systems and you too can be on your way to doubling your money in 3 years.
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