Individual Investors

Many individual investors decide for themselves which specific stocks to own. Whether the buying decision is based on sound research into the fundamentals, including a thorough reading of the various financial reports issued by the company, or whether price history charts are studied in an effort to perform a thorough technical analysis, or whether an investment decision is based on a tip received from a stockbroker, bartender, chat room, or a talking head on CNBC or Wall Street Week, investors seldom consider their entire portfolio when making a new purchase. The buying decision is often based on investors’ belief (hope) that some information has been uncovered—information not yet known to other investors—that will soon make the price of the newly purchased stock soar.

Some investors make investment decisions alone, shunning the advice of others. Some rely on the camaraderie of an investment club. Some listen to the advice of professionals before making the final decisions themselves.

Some blindly follow the advice of a stock market advisory newsletter while others do everything their stockbrokers suggest. Regardless of the source of an investment idea, most individual investors never think twice about whether the new investment is suitable or whether it helps them achieve their overall investment goals. In fact, many have no overall objectives in mind and simply make new purchases to produce a portfolio based on chaos. Some investors are happy with their results, while others are not. Modern portfolio theory (MPT) teaches us that this is a poor way to invest. With so many investors accumulating stocks and building a portfolio in this haphazard manner, it’s important to know: Are individual investors generally successful?

Investing in Mutual Funds
Many millions of other investors don’t want to take the time or make the effort to choose their own stocks. Instead, they rely on financial professionals to make investment decisions for them. Some of these investors follow the advice of a guru who sells stock market advice for a fee (e.g., newsletters and advisory services), while others accept the investment advice of financial planners or stockbrokers. But the vast majority of these investors buy shares of mutual funds.

Mutual funds serve a great purpose. They allow investors to quickly own a diversified portfolio of stocks without being required to buy shares in each of the individual companies. This is especially important for small
investors who lack the funds to own a properly diversified portfolio of stocks. It has been known for a long time that proper diversification is a strategy that reduces the risk of investing in the stock market. It’s one of the cornerstones of MPT.

Having decided to buy shares of mutual funds, investors must rely on the ability of fund managers to make intelligent investment decisions and earn a good return on investor capital. Some investors make a careful study of mutual funds before selecting which to buy. They study how well mutual funds have performed in the past; they check out Morningstar’s1 rating on the funds, or they accept the advice of a stockbroker.2 Some investors go further and choose funds that invest in the type of stocks they want to own.

For example, some funds only buy stocks of large companies; others specialize by investing in smaller, growing companies. Some funds buy stocks for income (dividends); others buy stock for long-term growth. Some funds specialize in the companies in one specific industry (sector funds); others are more diversified. Some buy stocks in American companies; others invest in businesses from around the world. There are many mutual funds in existence, each with its own investment strategy, and the public investor can choose any of them.

Some who buy shares of mutual funds invest their money, close their eyes, and, placing their trust in the fund’s managers, hope for the best. Others take the opposite approach and constantly monitor the performance of their funds and hop from one fund to another, chasing those with the best recent performance.

Most of those who invest in mutual funds would be better served if they had an understanding of how to construct a safer and better-performing investment portfolio on their own. Our goal is to show you, the individual investor, how to do just that.

Some investors are sophisticated enough to know how to avoid paying a sales commission (load) when buying funds; others pay that load, not knowing there is any alternative. The bottom line for the vast majority of mutual fund investors is that once the decision to buy a fund is made, no further thought goes into the process. They leave it to the fund management team to produce superior returns on their money. Over the years, most investors have been satisfied with this methodology, especially since the trend of the American stock market has been bullish over the long term. With so many Americans relying on mutual funds to meet their investment objectives, two important questions must be considered: Are mutual fund investors generally successful? Are they well served by the managers of those funds?

This review is from: Create Your Own Hedge Fund: Increase Profits and Reduce Risks with ETFs and Options

The best two skills I gained from this book were: How to build a portfolio and how to make money using one rather simple strategy. This book gave me the necessary confidence to take control of my own finances and provided compelling reasons for doing so. I learned that ETFs (exchange traded funds) are much less expensive to own than what Wolfinger calls 'traditional mutual funds' ...and, on average, make more money.