Published: Monday, August 16, 2010, 8:00 AM
Karin Price Mueller/The Star-Ledger
Q. I’m having a difficult time understanding the advantage of mutual funds or other managed accounts over owning the stocks directly. I have a portfolio of stocks and it’s recovering well from the recession and paying a good dividend income. I also have three managed funds which are not doing well at all. Any dividends and profits seem to go to the quarterly management fees. What are the advantages of these funds over owning stocks directly? Or am I in the wrong funds that are charging high fees?
-- Diana
A. There are a number of reasons why you may want to own mutual funds instead of individual stocks.
The biggest advantages mutual funds hold over individual stocks is diversification, professional management and convenience, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna. ‘‘Diversification lowers the risk of investing.’’
With stocks, you’re making big bets on one company, while a mutual fund allows you to invest a little in lots of stocks.
Another advantage of mutual funds is professional management. Trained, experienced investment professionals have the ability to with research, select and monitor an investment portfolio. The average investor doesn’t have the time or inclination for that.
For that privilege, you’re going to pay the management team to do its job. The typical mutual fund fees range from .50 to 2.0 percent, and you won’t pay that fee for stocks.
Mutual funds are also very convenient, Meckler said, and investment programs can be started with relatively small amounts of money.
In your particular situation, Meckler said you may have chosen individual stocks that have performed very well over the last year or so, while the mutual funds you have chosen are bad funds or are investing in industries that have not performed well since the recovery. He said you could have just as easily purchased individual stocks that did not perform very well since the recovery.
Meckler recommends average investor with a total portfolio less than $500,000 to invest in a well-balanced mutual fund portfolio.
‘‘It’s just too risky to pick individual stocks and be properly diversified below the $500,000 level,’’ he said.
The key issues that must be considered are investment performance, fees, and taxes, and the goal is to maximize performance while minimizing fees and taxes, said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.
That means the person or team you’re paying a management fee should be delivering performance that’s better than what you could produce on your own.
‘‘It would be a worthwhile exercise to compare your risk-adjusted performance on your self-managed individual stocks to your funds over the past few years assuming they are invested with a similar mandate,’’ said Kazanchy. ‘‘If the strategies have different mandates – for example you are buying domestic stocks and the fund buying emerging market stocks it would be apples to oranges comparison.’’
Send your questions to askbiz@starledger.com.
From nj.com published on Monday, August 16, 2010, 8:00 AM