Tag Archives: mutual fund

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.

Value or Dividends

The one question that I had to ask myself was I going to invest my money into stocks that were going to increase in value (price/share) over time or stocks that would be paying a specific amount per share.

Investing for value is by far the more riskier process. You can’t always tell if a stock’s price will go up or down. Take for example the 2 shares of Obalon (OBLN) that I bought back in 2019 before I really had a grasp of what I was doing. I had just signed up with Robinhood and I had $5 burning a hole in my pocket. At that time I bought 2 shares at $1.89/share and I bought 5 shares of Guardian Health Sciences (GHSI) for $0.206/share. I bought those shares because, at that time, I was focused on the Health sector and thought that investing in anything Health industry related was a smart investment. As I learned more I ended up changing my investment strategy (which I didn’t know it was a strategy then). A couple of month’s later I sold the Guardian stocks for $0.55/share. The Obalon share price had dropped down to below $0.80/share and hasn’t moved up over $1. I have a standing sell order to rid them at $2.20/share (about a 20% increase over what I paid for them). At this time, I’m not looking to lose money.

At the time I signed up with Robinhood I received a free (no cost to me) share of Lyft (LYFT). When I got it the share price was in the $40 range. I didn’t know anything about the business model for the company nor what their plans were. So, I just held on to the share and started doing some research about what was going on with Lyft. One of the things I learned was due to the lockdown because of the Corvid-19 neither Lyft or its competitor, Uber, were going to be going great guns in price. I also learned due to the restricted revenue due to the virus, revenue wasn’t planning on growing. Additionally, in all of the years that Lyft has been in business it has never paid any dividends and was not planning to do so in the near future. I ended up selling it for $29/share. I didn’t pay anything for it but I didn’t maximize the gain I could have gotten. I determined that value investing was not for me.

So, where did this leave me? It left me looking into dividend investing, where I invest in stocks that pay high dividends on a consistent basis. This is where Seeking Alpha and Finviz came in handy. I used Finviz’s Screener feature to identify companies/funds that were paying out high yield dividends. The criteria I used was:

  1. High Dividend Yield greater than 5%.
  2. The share price must be less than $20/share (I’m not overly rich).
  3. They have been paying dividends for many years and their dividend growth is on the positive side.

The logic for these is to be able to get the largest return I could and to be able to buy the maximum amount of shares (because dividends pay per share) with the limited funds. That’s not to say I am not invested in higher priced funds, but that’s for another post at a future time.

Based on the above criteria I identified 2 stocks; Arbor Realty Trust, Inc (ABR) and Ares Commercial Real Estate Corporation (ACRE). I then researched these stocks further on Seeking Alpha. They both fit with what I was looking for, were well within my comfort zone regarding risk, etc. I will use the dividend from these socks to reinvest into the same companies. At some point I will be looking to take the dividends instead of reinvesting but that will be a few years in the future.

Where to start

If you are like me you are new to investing and just starting out. Where do you start? A great question and I was lucky to know someone who was a seasoned investor and able to nudge me along in the right direction. The first thing my friend suggested was that I develop an investment strategy. What did I want to accomplish and what was the timeframe I was working with.

The first question was fairly easy – I wanted to replace my current wages with the passive income. The second one was already answered for me – 5 years. I didn’t have too many work years left for me. Father Time tends to catch up with all of us. Another factor in my strategy was that I wanted to avoid high-risk investments. I couldn’t eliminate ALL risks but I could avoid the high ones that have devastating financial results.

The other thing that I did was to learn whatever I could about investing and the different aspects of investing. I needed to learn which investing method would help me reach my goals. To this end I searched for online communities where I could just lurk and learn about investing. One of the ones I found was Investing For Beginners on Facebook. Although every group is going to have their share of annoying posters and useless posts & comments, you can still find some useful information.

I learned that Day Trading was not for me. Too risky. Proponents of Day Trading will tell you that you have to take big risks for the big payoffs. But to me that is too much like gambling at the casinos and I don’t do that. Value investing is not going to get me to where I want to be. Yes, I may win big but I also can lose all of my investment, which I may not have enough time to start from scratch again and recover. That left me with Dividend Investing.

Dividend Investing is where you invest in stocks that pay high & consistent dividends. Well, that was surely the way to go for me. Again, I spoke with my friend. He steered me to 2 online services that would help me determine which stocks to potentially invest in. They were Seeking Alpha and Finviz. So, I started to develop my detailed strategy of how I was going to invest my money.

  1. The primary step was to set aside 5% of my income toward investing.
  2. I then searched for stocks to invest in. My criteria was to select those that paid better than 5% and that had continuous and consistent dividend growth.
  3. I also wanted to remain within the REIT sector.

This was a good start.