What kind of investor should you be?
Shareholder or Owner?


Shaista Anwar
Asst. Professor (Finance & Accounts)

Individual securities or mutual funds? This question confronts people from the moment that they become investors. Will a portfolio of stocks and bonds or a few well-chosen mutual funds better serve your purposes, means and temperament? The answer, as so often in life: It depends.

Why funds?

One of the most commonly cited advantages of mutual funds is diversification. Investors may find it difficult to assemble a portfolio of different stocks across a wide range of market sectors. Yet a more limited collection may not be sufficient to cushion the effect when one or two of their holdings perform poorly. Mutual fund shareholders also benefit by having their assets managed by professionals. Few, if any, nonprofessionals have the knowledge and experience that mutual fund managers and their staffs put into analyzing stocks and market conditions. A third advantage is liquidity. Investors can obtain quickly the cash that they need by redeeming fund shares at their then-current net asset value. Of course, an investor can sell individual stocks, too, subject to industry settlement rules. But which stocks should be sold and what will be the effect of the sales on the investor's portfolio? A sale of a portion of a mutual fund investment won't necessarily alter the diversification of the investor's portfolio.

Why not funds?

Perhaps the most compelling argument for choosing to own individual investments is the degree of control that you retain. Another: It's relatively simple to keep track of your stock and bond holdings, how much you own and even—if you like to follow your investments closely—how each of the investments is doing on a daily basis.

That's a tall order with mutual funds, which may own shares in a large number of Companies. Of course, you can follow how the fund itself is doing. But it's just not feasible to expect that you can keep track of the full collection of securities in a mutual fund. Taxes are another issue. When a mutual fund sells stocks or bonds at a gain, you pay the capital gains tax. Because mutual funds distribute dividends and capital gains at year-end, purchasing shares late in the year means that you may receive a portion of your investment back fairly quickly—as a taxable distribution. The benefits of diversification are important. But a mutual fund that owns shares in a highly successful company won't have the impact on your investment return that owning the shares individually will. Performance of a particular stock is diluted by the overall performance of all the shares. Of course, knowing what stock is likely to bring huge rewards is another matter.

The question that will arise often in an investor's mind is: How much stock of a Particular company should I own? Generally, it's not a good idea to put more than 10% of one's money into the stock of a single company. Similarly, most professionals do not Recommend putting more than 20% into companies in the same industry. If a particular Company or a particular industry does poorly; you keep losses to a minimum. Investing with confidence whether you are choosing individual securities or mutual funds, the advice of a professional can prove invaluable. Chief among them is our ability to help you define your investment goals, develop an investment strategy and choose the specific investments to help you achieve those goals. In sum, create a strategy that is custom fitted to meet your needs and circumstances. And, of course, always ready to answer your questions and address your concerns.  Make the necessary modifications to your strategy and investments as changes in your personal circumstances and the economy dictate—as you direct. 

Successful investment management:

Assessing your financial needs and goals, tolerance for risk, investment time horizon and other constraints that you may have. Defining goals and needs. Therefore, to determine needs. Evaluate your current investments and retirement resources. Review your family circumstances. Pinpoint accurately your short-term and long-term investment goals.

These goals vary widely from individual to individual. For example, one individual may be looking to obtain sufficient capital in a relatively short time in order to acquire a business interest. Another may seek to accumulate assets for a vacation home or to acquire investment real estate. Parents or grandparents may want to build a college tuition fund for their offspring. And everyone is concerned about either saving for retirement or preserving assets during their later years.

Assessment is not just a one-time event, but a continuing process. As changes in economic conditions, tax laws and personal circumstances dictate, we will review and update strategies with you regularly.

The issue of risk

Once your goals are established, there's a wide range of investment options available from which you can choose. There are several factors that will determine whether a particular investment is right or wrong for you, one of which is the risk associated with that investment.

The assessment process includes probing your tolerance for risk. Are you someone who is at ease with upswings and downswings in the market—or are you apt to spend nights worrying when the market makes evens a minor downward turn?

The matter of time closely associated with the issue of risk is your investment time horizon. By analyzing your short- and long-term goals.

The general rule is simple: If you will need cash in the near term, your portfolio should include sufficient liquid and low-risk investments. Usually, these lower-risk investments (short-term Treasuries, money market funds, for instance) carry a lower return as well.

Many of our clients, however, are investing for the long term. Their portfolio is likely to lean more heavily on a variety of equities, which in the short term may be somewhat volatile but when held for the long term offer a better return. . Your tax status must be part of the investment equation. Investment return figures usually ignore the damage inflicted by income taxes.  In order to make your investment portfolio truly productive,  look at your income tax bracket and determine to what extent tax-exempt investments may be used to reduce your tax exposure…………..''''''

Shaista Anwar
Asst. Professor (Finance & Accounts)

Source: E-mail July 10, 2008


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