This is a really important Question, Should I buy stocks or mutual funds. I met with my adviser the other day and decided to take the view that stocks are a better choice than mutual funds and wanted to know what his opinion was. You see I was testing him since I know that he makes a lot more money from mutual funds than he does when I purchase a stock, even with the commission on the trade that he receives.
- My rational for purchasing stocks and not mutual funds was as follows:
- Mutual funds have not performed well in the past 3 years
- Mutual fund managers continue to collect MER’s (fee’s) even for poor performance
- You lose around 2% of the income a fund receives to fee’s
- Funds stopped making dividend payments to unit owners and still paid themselves the MER Fee’s
and he really could not argue with me on almost all of these points. I even told my investment adviser that if I have this wrong or do not understand something, please tell me where I am not understanding things properly. There was no answer really to my statements. In fact, what he did say surprised me.
Stocks or Mutual Funds – My Adviser’s Reaction
Mutual funds are for people who do not have time to manage their own investments and want diversity as well as professional management. Also mutual funds often invest in many of the same companies unless you really go far a field. For example a balanced fund would have many of the same stocks that dividend fund would have! Were is the diversity?
I have reached the conclusion that I really do not have that great of an investment adviser despite all of the conversations I have had with him over the years. Still my portfolio has grown and it is intact. I have recovered from all of the downturns and grown well beyond the original values. I did not lose half or more of my portfolio’s value during 2008’s market dive, so on those fronts I have recovered nicely.
What Have I learned from this Conversation?
I guess I have learned several things from this current episode or discussion with my adviser which can probably be applied to many advisers we might work with:
- He is just a guy like me, maybe a bit more informed
- He has no magic crystal ball
- He is managing the averages and avoiding significant risk areas
- His guidance overall has meant that I have done well with my portfolio
- Am I satisfied with the services he provides in general, yes
- Could I have done better, absolutely
- Should I change to another adviser – no, sometimes it is better to have an honest conservative adviser that you know.
The bottom line is that I will stay with my current adviser , however I will be challenging him a lot more and pushing him to justify his recommendations. As always all decisions about investments will continue to be mine, but I will be doing a lot more of my own research than I did before. My basic strategy is to invest in blue chip companies with a history of high quality bonds, regular dividend payments and a history of increasing their dividends!
General Trends and Guidance
Here is some more to think about regarding investing , regardless of whether you choose mutual funds or stocks:
- Stock prices are cheap compared to earnings.
- Earnings are growing at a healthy pace.
- Economic growth is likely to continue.
- The TSX and S&P 500 dividend yields are higher
- Stocks have underperformed bonds.
- Consumers lack confidence.
- Volatility is high.
- Companies have cash, and they’re not afraid to use it.
- North American companies are global companies.
- Inflation is powerful.
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