Investor’s Guide to Choosing Stocks and Bonds

If you have your retirement money in a mutual fund you probably don’t know the real cost. When you find out how much of your profit is going to fund overhead you may want to simply pick your own stocks and bonds to invest in. First let’s look at the cost of a mutual fund and then look at an investor’s guide to choosing stocks and bonds.

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Hidden Cost of Mutual Funds

published an insightful article about the real cost of owning a mutual fund.

Most investors are only aware of the expense ratio which is an ongoing yearly charge of about 0.9% to pay marketing costs, distribution costs and management fees. Addition costs of a mutual fund include transaction fees at about 1.44% per year. Then there are tax costs or about 1.2% a year and the cash drag of cash held to maintain fund liquidity at about 0.83% a year. A soft dollar cost hide expenses but costs you money and advisory fees can run from 0.25% to 2.5%. The total cost of having a mutual fund invest your money comes to about 3% in a non-taxed account and about 4% in a taxed account. In our article, When to Start Investing in Stocks, we noted that a 7% per year appreciation can be expected with solid stocks and long term investing. If you are investing via a mutual fund you can cut that in half. So, what is your alternative?

Picking Your Own Investments

looks a choosing stocks and bonds instead of going with a mutual fund.

They quote the legendary fund manage Peter Lynch as saying that you need to be able to invest for at least three to ten years and have the math skills of a fourth grader to be successful in stocks. The advantages of picking your own stocks is that you get all or the gains with a winner. You have control over your investments. And you can respond quickly when opportunities arise. Also you will not be paying capital gains on stocks being bought and sold by a mutual fund if you simply buy and hold a set of well-chosen stocks. If you want to broad based investments seen in a mutual fund with a lot more transparency, consider an exchange traded fund.

Another useful approach to finding new and trending investments is using alternative data in finance. For example, Google searches for stock names have positive correlation with stock price movement the following week!

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