Christian Financial Planner

Why Mutual Funds?

Whenever we talk about investing in the stock market, we almost always recommend doing so in the form of collective investments. Collective investments are those structured so that a variety of individual stocks are assembled to basically form one investment, and the investor purchases shares of that one investment. The mutual fund is probably the most well-known of the collective investment options, while another vehicle, the exchange-traded fund (or ETF), has seen its popularity grow in recent years, as well.

The reasons for looking to collectives as a way to enter the stock market have always been good, but are probably even better and more important now, in light of the recent economic collapse that has touched all of us. While there are many reasons to opt for funds when considering the stock market, here are three of the best:

Diversification –

This remains the singularly best reason for looking to collectives. Investing in the shares of a single mutual fund can provide you with an interest in 50 to 100 (or even more) different individual stocks. While diversification can weigh down investment performance by virtue of the underperforming stocks invariably contained in a wide and varied portfolio, that potential disadvantage is universally regarded as being much more than offset by the benefit provided by diversification, which is the relative safety associated with having your money rest with the fortunes of not merely two or three companies, but many. This is something that was brought home to a lot of folks when the value of the equities markets plunged two years ago, and entire industries were devastated. The investors who owned several, different broad-based mutual funds were able to realize a measure of portfolio resilience not available to others whose fortunes rested with just a handful of select companies.

Professional Management – When you buy a mutual fund or managed ETF (ETFs are generally unmanaged because historically they’ve only tracked indexes like the S&P 500, but more and more ETFs with the feature of active management are coming to market), you receive the benefit of having the underlying portfolio of stocks you’re purchasing overseen by professional asset managers who are paid based on the ongoing performance of the fund. Not only, then, are you relieved of the mechanical processes and details associated with assembling your own portfolio of stocks, but you are also relieved of having to actually manage the stocks and determine the best time to buy and sell.

Lower Costs - Collective investments, by their very structure, give you the ability to keep your costs much lower than if you sought to own the same number of individual stocks on your own. In the same way that insurance costs are lower when there are more consumers in the pool over which to spread those costs, the same general principle applies with mutual funds and ETFs. Annual fund expenses are generally quite low, and can be even lower with ETFs, precisely because they are usually unmanaged and also because their goals of tracking indexes don’t demand the portfolio turnover that can result in greater tax liabilities to the fund.

As the securities markets continue to evolve, and as global markets become much more complex and interrelated, it will be even more difficult to profitably select and manage one’s own portfolio of individual stocks. Granted, owning several different mutual funds may not sound as exciting as saying that you own shares of Microsoft, or Apple, or General Motors (maybe nobody needs that much excitement any longer, anyway), but in the quest to realize long-term investment success through markets and economies characterized by increasing complexity and less predictability, it’s going to be the smartest way to go.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever.  It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column.  Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.  

Creating an Investment Portfolio from Practically Nothing

One of the most stubborn myths associated with investing is that you need a lot of money to actually be a participant in the activity of the major markets.  It’s understandable why people have this perception – the popular notion of “fat cat” investment types, chewing on big cigars and sitting around in cushy, leather chairs reading The Wall Street Journal has permeated the ideas of most casual observers about what it takes to be an investor.  The reality, however, is far different; in truth, just about everyone can create an investment portfolio through the use of automatic investment plans made available by some of the world’s most well-known mutual fund companies.  Using plans like these, it is possible, in some cases, to start investing with no money up front and making regular, monthly contributions that come out to as little as less than $2 a day.

Take the storied mutual fund company T. Rowe Price, for example.  T. Rowe Price (www.troweprice.com) has something called the Automatic Asset Builder, which waives normal minimums for their no-load (no commission) mutual funds if you agree to allow your bank account to be drafted each month for at least $50 and have that money invested directly into a T. Rowe Price fund of your choosing.  This is a great option, for a few reasons: There is the intended benefit of being able to invest in a professionally-managed investment portfolio for no money up front and very little each month.  However, there is also the unintended…but very useful…benefit of dollar cost averaging that is at play when you invest systematically each month into mutual funds.  With dollar cost averaging, your overall market risk is reduced because you’re purchasing smaller amounts of the portfolio each month, and doing so over a longer period of time.  This reduces the risk that you will pay a high price for too many of the shares, because you’re not going into the market with a significant lump sum at any one time. 

Other no-load mutual fund companies offer plans similar to that which T. Rowe Price offers; T. Rowe Price is cited here not as a recommendation for you, but rather as an example; an example of a professional investment company that has made it quite possible for wishful investors who think they haven’t enough money to begin accumulating a quality basket of securities to be proven wrong.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever.  It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column.  Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.   

Yes, Real Estate CAN Be an Easy, No-Hassle Asset in Your Portfolio

In the face of the worst economic collapse in the post-World War II era, few among us are excited at the prospect of buying a home to live in as our own, let alone buying one as an investment.  That said, it is a good time to look at adding real estate to your portfolio, and the good news is that you need not buy a physical property in order to make that happen.  Real estate of all kinds has long been available in the form of negotiable securities, and for those of you who are disinclined to grabbing that empty foreclosure down the street and becoming a landlord, you might find investing in real estate securities to be a quality, even superior, alternative.

There are a lot of ways to make such an investment, but we prefer the use of collectives like real estate investment trusts (REITs), and further prefer to invest in REITs through mutual funds and exchange-traded funds (ETFs).  The benefits of securities like these, in general, lie chiefly in their diversification and lower costs.  The SPDR Dow Jones REIT ETF (symbol: RWR) is a U.S. real estate index that gives you investment access to over 80 of the largest U.S.-based REITs in a single ETF, while the SPDR Dow Jones International Real Estate ETF gives you the same sort of access to REITs that have large commercial holdings of all kinds around the globe. What’s more, the annual costs of these REIT ETFs are very low…roughly between .25 and .50 percent per year.

Just as there’s more to investing in physical real estate than simply running out and buying a property, you have to do your due diligence to be sure the real estate securities investment you’re considering makes sense, as well.  That said, the convenient access to securitized real estate both here and abroad provides to all investors the opportunity to take advantage of the fire-sale prices of global real estate for a fraction of the effort and expense associated with buying an actual property, so adding real estate as an asset class to your portfolio should be a strong consideration.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever.  It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column.  Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.    

If “Buy & Hold” is Out…Does That Mean Market Timing is the Answer?

Although the return of a semblance of normalcy to the stock market is prompting many to test the waters again, the upheaval of recent years has reinforced for many the idea that picking what at the time is thought to be a smart selection of securities and simply holding on to it…known as the buy and hold strategy…is actually not too smart.  For a few, the sometimes-sudden twists and turns in the market validate the idea that money should be moved nimbly and quickly…in and out of equities, in general, as well as in and out of specific sectors and even individual companies; moving money in this way is known more generally as market timing, and while it seems like a good idea, in theory, the success rate of the strategy remains largely in question.

Here’s a brief example: During the first week of 2008, the market saw a ton of volatility; the Dow fell 680 points on Monday, December 1, and, in a very uneven fashion, rose 646 points during the remainder of that week.  Now…according to TrimTabs Investment Research…investors sold $16 billion of mutual funds on that losing Monday, and had invested $4 billion back into the market by that Friday.

To be fair, it cannot be stated that all of the people who moved money that week were actively engaged in a specific market timing strategy when they made their buy/sell decisions, and a large number were likely doing no more than making those decisions on the basis of a hunch or two as well as on how they processed that week’s news, but it’s probably also fair to say more generally that a review of the activity that week reminds us that whatever methodology most used to ride the market down 7.7 percent on Monday was not functioning well enough to get them back in to enjoy the return ride of 6 percent during the remainder of the week. 

The problem is that for even highly-experienced asset management professionals, the behavior of the market, in general, as well as of the sectors and companies that comprise it at a more elemental level, is difficult to predict…and it’s really the inability to predict the short-term future that makes market timing so difficult and, invariably, futile.

The best way to invest remains what some might consider to be a mix of buy and hold and market timing…but is really neither.  The best way to invest is to select a diversified portfolio of quality mutual funds…themselves well-diversified, too…and evaluate that portfolio regularly to be sure (or as sure as anyone without a crystal ball can be) that the sum total of the holdings represents both your investment goals as well as the economic climate for the foreseeable future.  Rather than seeking to move all the way in or out of markets, or to initiate transactions with daily or weekly frequency, the objective is to adjust the weightings of your core holdings, to the best of your availability and as conditions and expectations warrant, so that you are positioned as effectively as possible at all times.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

 None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever.  It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column.  Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.