I asked for it.
In last Wednesday's
column, I listed some caveats for investors who might be thinking about moving their money from mutual funds into individual stocks. My central point: There is a lot more to picking stocks than, well, picking stocks. Investors will have to consider diversification, time and risk, among other things, when running their own stock portfolios.
The column acknowledged that many people have certainly had success in running their own money, but that disclaimer didn't shield me from some readers' scorn.
thought I underestimated
Your piece on being your own fund manager seems to be directed to high school kids. Much too much negative and no useful information for anyone who would be reading TheStreet.com. A waste of your time and ours. We are not babies.
Dennis, while many
readers are, no doubt, pretty sophisticated investors, there are many who aren't. An estimated 77 million Americans own mutual funds and not all of them have a Ph.D. from the
University of Chicago
. These investors are being peppered with suggestions in news stories and in advertisements that they can do better by moving their money out of funds and into individual stocks. Call me crazy, but this topic seems just as important as credit-spread arbitrage.
Some readers accused me of being a shill for the mutual fund industry and failing to point out that the majority of active managers haven't been able to beat the index. I make no attempt to gloss over the fact that most managers can't beat the
. Indeed, 1993 was the last year that the majority of actively managed general equity funds outperformed the S&P, according to
. But that doesn't mean it is impossible to find some solid, inexpensive mutual funds among the universe of 7,000-plus funds.
laid out the benefits he has received from buying his own stocks:
There are many points that I can make for investing in individual stocks vs. mutual funds, but to me, one of the greatest is that my goals, priorities and incentives may be vastly different from those of the typical mutual fund manager. If I want, I can hold a company in my retirement plan for 40 years, weather the valleys, manage capital gains for my convenience, change styles, double down on dips, move out of small-cap positions without budging the price. ... And, most of all, I have no one to answer to but myself, no window dressing, no short-term performance incentives, no marketing or Morningstar stars to worry about. And stocks are a lot more interesting and fun.
also believes she's better off in stocks, though she has a head start on most investors:
I increased my stock portfolio 90% last year due to my research -- but there is some truth in your article. I was able to increase my portfolio because I am an analyst by profession
I cut down on my workload at the same time. But still, if you have some background in research, online market research tools and have good analytical skills, you can do as well as any brokerage firm. You know why? Because the typical broker, like doctors and dentists, doesn't have time to devote his or her attention exclusively to your portfolio. They just don't, and they really don't care as much as you do because they can always get another client.
I understand. My dad, for one, has been grumbling about not being able to get his broker on the phone lately. That is a complaint that I hear from many investors, in and out of the family. Relying on a broker, adviser or planner is a tradeoff for some people, but plenty of investors do need the advice of a professional.
is one of them:
Ever since I got my laptop and free Internet access from my employer on Jan. 4, I have been attempting to educate myself in the investing world. I've laughed. I've cried. I've winced. One of my conclusions to date is that there's too much information and there's always someone out there who will know more than me.
agrees with me that if you're going to be a stock investor, you should be ready to do your homework:
If an individual investor is not willing to put in the time to research a company prior to purchasing its stock, then said investor is much better off staying out of individual stocks. That said, there are two ways that an individual investor can practically guarantee himself or herself of beating the vast bulk of actively managed equity funds: Buy an index fund such as (VFINX) - Get Vanguard 500 Index Inv Report Vanguard 500 Index fund or buy SPDRs (SPY) - Get SPDR S&P 500 ETF Trust Report, or spiders.
(Spiders are exchange-traded shares of a trust that are designed to mirror the performance of the S&P 500.)
For those that don't want to spend the time, the above two approaches will at least guarantee that the investor isn't paying too much for the privilege of investing in equities. Personally, I have no desire to pay for a fund manager's 4,000-square-foot house and 5 Series BMW.
But I think
addresses the central reason I wrote last week's column in the first place:
I have worked day and night, and I have had more losses than wins. Many more. I have developed a preulcerous stomach and all this in six months. It is a total nightmare and a financial disaster. ... This loss will change my life totally. I needed the money I had for the retirement I have already started.
Send your questions and comments, along with your full name, to
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.