Don't Get Caught Up in the Great Debate

September 16, 2008
Jonathan Krasney, CFP&#174

Physician's Money Digest, March15 2003, Volume 10, Issue 5

Stocks are better! No, mutualfunds are better! No, stocksare better! Does this soundfamiliar to you? The ongoing battlebetween investors who own stocksand investors who own mutual fundshas existed for quite some time. Therecent fears of terrorism, rising interestrates, and negative or untrustworthycorporate earnings havemanaged to fuel the great debate'sfires. Before you feel compelled tochoose a side or grab your team'smegaphone, it may be a good idea tocall an investor timeout and quicklyreview some mutual fund facts.

MUTUAL FUND SPOTLIGHT

Although many investors todayare clinging to depressed stocks fora number of reasons (eg, they feelparalyzed, they're convinced it willeventually improve, they're emotionallyattached, etc), investorswho are 100% opposed to mutualfunds need to reconsider the advantagesmutual funds offer. Taking asecond look at the enemy's argumentsdoesn't require changingsides; it merely provides the opportunityto gain further insight. Considerthe following arguments indefense of mutual funds:

• Fund managers know morethan you. This is not an insult. Inyour defense, you know more thanfund managers when it comes tomedicine—much, much more. However,when it comes to valuing astock, fund managers take first place.For example, many investors will buya stock like Intel because it is a topplayer in an industry that is shapingthe world. However, in a competitivemanufacturing environment,and with such a high price/earningsratio, fund managers, unlike retail investors,would not be in such a hurryto buy this particular stock.

Many investors don't understandthe difficulty involved withthis type of valuation work. Andmany lost a fortune in the past fewyears because they didn't correctlyknow how to analyze their stocks interms of proper valuation. Fundmanagers alleviate the pressure ofhaving to analyze your stocks. Theytake the stress out of the work, andthe work out of your busy days.

In addition, with the click of abutton, fund managers can easily callup John Chambers at Cisco Systemsand find out the real story on whyearnings were down this past quarter.As a retail investor, you do not haveaccess to management or the priceyanalysis tools and research servicesavailable to fund managers.

• Time is not on your side.Investors researching their investmentideas spend an enormousamount of time. The truth is, mostfund managers work full time andstill don't beat the market averages.Since free time is sometimes a luxuryfor physician-investors, do youreally want to spend your preciousfree time crunching financial data?

Diversification is more complete.Sure you may want a diversifiedportfolio, but managing toeffectively diversify your portfoliocan be a problem when you're notfully aware of what a true diversifiedportfolio looks like. Fundmanagers have the time, knowhow,and ability to diversify yourportfolio so that you're meetingyour expectations and properlyspreading your portfolio wings.

In addition, fund managers areable to diversify on several differentlevels including: market cap (large,mid, small), style diversification(growth, blend, value), active vspassive management (ie, index vsactively managed funds), and USand international stocks. Owning afew funds concentrated in each areawill get you to your goal much morequickly and probably more effectivelythan researching many multiplestocks in each of those areas.Diversification and risk managementare the key words here to creatingpredictability of outcome.

• Individual investors makemistakes more often. When tradesare made in the world of fund managing,they require substantial accountabilityto shareholders. Tradesneed to be explained and justified.The pros are more disciplined intheir approach to investing and moreanalytical in their reasoning than theaverage investor. Many times,investors get scared out of the marketat exactly the wrong time, andsell when they should have bought.Shareholder accountability keepsfund managers honest and accountable,which makes them less likely tomake emotional errors.

THE PRICE OF INSIGHT

One of the leading arguments bycritics who prefer stocks to funds isthe price tag attached to mutualfunds. Unfortunately, there's no wayaround it. Expenses are inherentwith owning funds or having moneyprofessionally managed. In addition,there are management fees to dealwith. And these types of expensescan quickly eat into returns.

The upside to the "fee" factor isthat a number of mutual fund companiesand advisory practices workwith financial institutions that offeraccess to a universe of funds. As aretail physician-investor, you wouldhave to pay transaction fees and/orsales charges to have access to thisfund world. Mutual fund companiesand advisory practices can frequentlyaccess these funds at notransaction or sales fee.

Taxes are another considerationthat often come up in the greatstocks vs mutual funds debate.Unlike stocks that are taxable whenyou sell them, mutual funds canhave annual distributions, regardlessof when you bought the fund.However, the actual amount lost totaxes is negligible and not nearly asmuch as most people think. By payingsome taxes now, you are reducingthe tax liability you'll have topay when you ultimately sell. Taxednow or taxed later, however, the tax-manstill gets his share.

Moreover, some practices orcompanies will look for funds thatcater to the tax-conscious investoras part of their philosophy. Thesesame mutual fund providers canalso implement additional strategiesto offset the tax issues (eg, selectivetax-loss harvesting).

Keep in mind that your mutualfund advisor should not only workfor you; they should also work withyou to assure your needs are met.So, if you're one of the manyinvestors currently in the darkregarding the benefits of mutualfunds, hopefully some light hasbeen shed, allowing you to see theadvantages a little clearer.

Jonathan Krasney is a Certified

Financial Planner™ practitioner

and president of Krasney

Financial, LLC, in Brookside,

NJ. He is an expert in personal

finance issues for high-networth

individuals and often assists clients in

estate planning issues, tax management,

bonds, mutual funds, and charitable giving.

He has appeared on CNN, CNNfn, and can

be seen regularly on CNBC's Power Lunch

"Making Your Money Work" segment. Mr.

Krasne

y welcomes questions or comments at

888-572-7639 or info@krasneyfinancial.com.