Looking anew at ETFs and mutual funds

The summer newsletter issue of a brokerage IFO reads had an interesting article on ETFs and mutual funds. The most interesting part was the notion that buying one or more of these financial instruments is a substitute for buying individual stocks.

IFO’s question is: why? Ask yourself: Am I afraid that I am so uninformed, even ignorant maybe, and unable to look at companies, that any individual stock or bond I buy might drop to zero? But that’s why you are reading Investing for One, isn’t it?

But no. That won’t happen if you follow IFO’s advice: do your due diligence. Look at the CEO and the history of the company and its share price over five or ten years, yield, years the company has paid dividends and then pick a few stocks to buy.  Joseph D. Mansueto

A couple of ideas for finding quite safe (but not foolproof) stocks – look at the Dow Jones Industrial Index components and pick a couple of companies from there to start with. These companies are the crème de la crème. See any you like? Brands you recognize and admire?

Now, can you do that as easily with an ETF or a mutual fund?  That newsletter says there are 1,700 ETFs; about 350 Index mutual funds (funds attempt to mimic a popular index like the Standard & Poor’s various indexes, or the Dow itself); and more than 7,200 “unique actively managed mutual funds,” according to fund tracking newsletter Morningstar.

While finding the Morningstar link, IFO learned something new! Thank you, readers. You inspire me! Anyway, the newsletter company is now a publically traded publishing company (MORN:Nasdaq). This company started out as an 8-page newsletter in 1984. It was founded by its current CEO, Joseph D. Mansueto. There’s a fabulous article about him here.

IFO got her start in investing by reading that newsletter. A useful feature on the back page in the 1980s was a list of top performing mutual funds and the stocks they favored. Bypassing the middleman, she simply picked out stocks from that list one at a time as she gained confidence and capital.

By the way, the linked article was written in 2007 and it notes that there were 8,000 mutual funds, 500 fewer than the 7,550 noted in the first newsletter mentioned above. Maybe they were rounding up? Or did the financial collapse of 2009 take out a few of those “safe” mutual funds? We’re not going to look it up today – maybe another time.

It was only later that she learned about Dividend Aristocrats, companies that have been increasing their dividends for the past 25 or more years. This is another great source of ideas for conservative investors.

She has now graduated to highly speculative stocks which she only buys in her little IRA funds, a mere 8% of her total stock holdings – a necessary curb on her enthusiasm.

So, don’t be a scaredy-cat. Just get started and enjoy the ride. Oh, you might want to wait and see what the market thinks about Greece’s financial crisis before you buy anything just now. But, be ready with your picks and then decide when to jump in.

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About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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