Stocks vs. Stock Mutual Funds

This newsletter also includes the usual info from Vanguard as well as a short segment on stocks versus stock mutual funds.

Vanguard Weekly Recap

The U.S. economy continues in sputter mode. While July saw some improvements in industrial production and housing starts, the most recent initial unemployment claims rose for a third straight week. For the week ended August 20, the S&P 500 Index fell 0.7%, to 1,072 (for a year-to-date total return—including price change plus dividends—of about -2.7%). The yield of the 10-year U.S. Treasury note dropped 6 basis points to 2.62% (for a year-to-date decrease of 123 basis points).

Stocks vs Stock Mutual Funds

The environment for owning stocks has drastically changed since the advent of low cost on-line stock trading. Brokerage houses still desire to make more money each year so that they can grow and pay people very very very nice bonuses. The only way their revenue can grow with this low cost on-line stock trading environment is to get investors to buy and sell a whole lot more often. On Mad Money, Cramer of Cramerica will tell you to Buy Buy Buy or Sell Sell Sell a specific stock and his viewing audience is to follow his recommendation like he has divine knowledge.

It use to be that you bought a stock and held onto it because the environment for stocks was fairly normal, a buy and hold strategy. Today stocks are much more manipulated as an individual or a group of individuals can move a stock up or down in a major way. These brokerage houses have computer programs that execute trades based upon a number of factors including momentum.

So what should you do if you like to own stocks? Do not get married to them, follow them, and be willing to take a profit. Brokerage houses have hired psychologists to study investor behavior and the higher the stock price the more likely an individual is likely to buy it and conversely the lower the stock price the more likely an individual is likely to sell it. The reason is an individual investor tends to get emotionally attached and feels successful when their stock is successful and vice versa. Brokerage houses tend to do analysis, I did read a very thick and boring book on security analysis some years ago, and will tend to do the opposite of the individual investors.

An individual stock can be moved in a fashion that is not logical and is out of your control. It can go to $0.00 and you can lose 100% of your money. It is hard to know if you should buy, sell or hold a stock when you are in a competition with a brokerage house with computer programs that do security analysis and is funding TV shows and analysts to get you to make a trade. In a trade, every seller must find a buyer.

My opinion is that the average investor should only have about 10% of their holdings in individual stocks. A mutual fund that invests in individual stocks has much less risk due to diversification and performance can not be influenced to the same extent by outside forces.

If you find that you have a relatively high loading of stocks, my advice is to use a rebound in the stock market, that is stuck in a trading range, as an opportunity to sell. While it is fun to watch a stock to go up, it makes you feel good, the going down is a terrible ride. A bird in the hand is indeed worth 2 in the bush.

Six Tips For A College Freshman

#1 The first week defines the rest of the year
#2 Organize Study Groups!
#3 Study for tests!
#4 Get involved
#5 If you don’t like your roommate, switch
#6 Go to sporting events