Why I Prefer Mutual Funds & ETFs

As I mentioned previously, before you start investing you should spend some time learning the different options available to investors. One option is to invest in stocks. Another is to invest in mutual funds and ETF (exchange traded funds). Just so you have a basic understanding of those 2 options, let me recap:

ETF – “An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.”

Mutual Funds – “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.”

I prefer these because they include multiple stocks, not just a single stock. If you buy one stock and its share price tanks or the company ceases to exist then you have nothing. With mutual funds and ETFs there are multiple companies within the funds so if one starts to tank it can be replaced with a better performing one. You don’t lose that much value or shares.

With a single stock if the company decides to split its shares your stock price get diluted (price per share goes down). If the company does a reverse split you end up with less shares (not good if you’re looking for dividend income). With MF (mutual funds) & ETF (exchange traded funds) you never see this because these funds are managed for you. You do pay a small fee for this service but as long as the activity within the fund is low, so is the fee.

I do own a couple of individual stocks but the majority of my investment activities are with mutual funds and ETFs. I invest my 401K money with Vanguard 500 Index Fund Admiral Shares. My ETF investments are with Vanguard Real Estate ETF and Vanguard High Dividend Yield ETF. Yiu can pretty much surmise that I lean toward Vanguard funds. It’s pretty much a hands-off situation with those investments. I just invest more when I have the funds available and make sure I buy at the lowest price possible. That’s not saw that I don’t review the status of those funds but I don’t feel I have a need to be tinkering around with them.

I also have money invested in a mutual fund with my bank, FT Innovative Technology (FKUVBX). Again, I don’t concern myself as much with the share price as I am with the dividend payout. Especially with the mutual fund because the you need a minimum/increment of $1000 to add to the fund. This, to me, is the one drawback with mutual funds. At this time I can’t come up with $1000 to add to the fund. My investment fund is increased by $60-$200 at a time. Whenever I transfer any amount into the investment account, I like to have the money invested within a few days. I prefer to have my money working for me instead of just sitting and “collecting dust”.

So, to recap my basic strategy:
1. I want to add money into my investment funds in order to have funds available to increase my current holdings or to take advantage of a unique opportunity.
2. I want to invest in stocks that have a high dividend yield.
3. I prefer individual stocks to be priced below $20/share and ETFs to be priced below $100/share. The purpose here is to maximize the number of shares owned. I will trade off a higher price per share for higher dividend yield.
4. In the short term (within the next 5 years), reinvest the dividend back into the stock/fund. Grow the amount of shares owned.
5. View drops in price for shares as opportunities to increase number of shares owned because dividends are paid per share.
6. Keep a watchful eye on the declared dividend amount. If a company reduces the amount paid twice in a row, stock is a candidate for replacement. This only applies to individual stocks owned. Mutual funds and exchange traded funds are managed for you.