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One of the most frequently asked questions we receive as a money management firm is,
"Why shouldn't I just put my money in mutual funds?" It's a valid
question, so let's examine it more closely.
What is a mutual fund?
A mutual fund invests the money of its shareholders in a group of stocks.
You can purchase shares in a mutual fund, just like you might purchase shares of stock in
a company. Your investment is pooled with many others and the managers of the
fund buy shares of stocks or bonds in many companies. When
the securities purchased by the fund manager do well, you make money.
Some mutual funds require the payment of a "load" or a sales charge to get
into the fund. The "load" is charged either at the time of purchase or at
redemption. This charge can be as high as 8.00% of the assets invested. Other funds,
called "no-load funds," do not require this fee.
All funds charge a small annual management fee. The fee can be as high as 3% of
assets or as low as 0.20% of assets. The typical annual management fee is 1%.
There are more mutual funds on the market today than there are stocks listed on the New
York and American Stock exchanges combined. Choosing the right fund can be a
daunting task!
When should you invest in mutual funds?
Portfolios of less than $100,000
Mutual funds provide diversification (which minimizes risk) at a lower cost when a
portfolio is less than $100,000. Why is this? Essentially it has to do with
the transaction costs of purchasing individual stocks and bonds.
Imagine that you are an individual investor with a portfolio of $100,000. Let's
say you are not investing in a mutual fund. You want to have a diverse portfolio to
minimize risk. A diverse portfolio starts with the assets allocated between stocks
and bonds. Let's assume a neutral allocation of 50/50. With $50,000 you could
adequately diversify the bond portion of the portfolio by buying five separate issues in
$10,000 lots. With the stock portion, achieving adequate diversification would be
more difficult. This requires holding stock in 15 to 30 different companies in at
least 10 different industries. Buying stock in 15 to 30 different companies would
require buying in small lot sizes and often odd lots (fewer than 100 shares). You
pay a higher transaction cost when purchasing small or odd lots. In this situation,
the higher cost per share can significantly affect the portfolio's performance.
If, however, you invested your money in a mutual fund, the fund manager pools your
money with many investors to purchase securities in high volumes. These purchases
have a lower transaction cost. You benefit from this.
Advantages of using A Money Manager
Fund Control
When you work with a money manager like Lyon Capital Management your goals are the top
priority. With a mutual fund, you are not in control of how your money is
invested. Investment managers for the fund make decisions about what to buy and sell
based on the goals of the fund, not your goals.
Capital Gains Control
When you work with an independent money manager (instead of investing in a mutual
fund), you can time your sales (and capital gains) precisely to suit your tax
situation. If there is a year in which you have a relatively high level of income
from other sources, it may not be advantageous to recognize additional gains.
With a mutual fund, you cannot control when you receive capital gains. The
investment managers for the fund are not aware of your individual tax circumstances and do
not time buy and sell decisions to suit your tax situation.
Personal Attention
When you work with Lyon Capital Management you deal directly with the investment
decision maker. You can call at any time and discuss your portfolio. In
addition you receive stock reports whenever we buy or sell a security for your
account. We understand that while our clients have hired us to manage their money,
they still want information about their investments. When you purchase shares in a
mutual fund, you will probably never speak with the investment decision maker. You
will only speak with a sales representative for the fund. If you want a comfort
level with your money that includes access to the decision maker, a mutual fund is not the
vehicle of choice.
Mutual funds can be advantageous for small investors. If you have a larger
portfolio, want to control your capital gains taxes over time, or want the personal
attention an investment manager can provide, select a competent registered advisor, like
Doug Lyon of Lyon Capital Management, instead of a mutual fund.
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