The present state of investing

For most people, investing involves buying the cheapest no-load (commission-free) S&P 500 index fund and foregoing all other considerations. The reason is for the past several decades the idea being promoted is you can’t beat the ongoing annual return of this index so you might as well buy the cheapest one and ignore all other investments. But, there’s a flaw in this logic. Quite simply, it fails to consider the lifecycle of the individual investor.

You see, early on in the investor’s saving years striving for maximum returns makes sense since he has years of investing to weather the ups and downs of the economy. Additionally, since he won’t be withdrawing money anytime soon he isn’t worried about generating investment income. With the passage of time, however, investors no longer have the luxury of time to weather the ups and downs of the market. Likewise, once retired, the need for investment income dramatically increases rendering the S&P 500 insufficient as a preferred investment for many retirees.

Of course, there are also those who look to freewheeling active fund managers to produce outsized returns or pursue some other investing objective. But, chasing returns likely has those folks disappointed since only a handful of professional managers have the stock-picking expertise to produce outsized returns with any consistency. Short-sightedness has many of them chasing the same hot stocks as the average investor leading to disappointment and sub-par returns when the excitement wears off. Then there’s the negative impact on returns caused by higher fees, increased taxes and capital gains due to frequent trading.

Is there a better alternative to choosing mutual funds?

For many people buying shares of individual companies makes better sense than purchasing mutual funds. Instead of striving to keep up with or beat the stock market on a quarterly basis it shifts the focus to owning a portfolio of companies that match the preferences and needs of the person. Take, for example, investment income. Why own a lopsided basket of companies many of which don’t pay dividends when you can maximize your investment income with a portfolio comprised entirely of dividend companies with proven track records of consistent payments? And, how about the wide swings in one’s portfolio balance? While there’s no way to totally eliminate the fluctuation, there are ways to curtail it. Did you know you can buy shares of companies with histories of smaller price fluctuations? You can also lower fluctuation by reducing a portfolio’s concentration in certain areas of the economy.

To begin the conversation about building a personalized portfolio that reflects your individual preferences call or email today.

Dennis Gravitt AFC® CFP®

contact info:

email –  dennis@longrunfinancial.com

phone – (815) 464-9275.