Why You Should Use A Mutual Fund
There are a number of reasons why the vast majority of investors should use mutual funds, particularly when it comes to investing in stocks. One reason you should use a mutual fund is because of its management. These are the folks that decide what to buy and sell and when. Mutual funds can provide the objectivity individuals lack. The reason why you should not try to manage your own stock portfolio is similar to the reason why doctors are not supposed to operate on members of their immediate family.
Not only do mutual funds have greater objectivity than individual investors, they also have resources and talent that you and I do not have—and they are less likely to be tricked by market hype. Relying on the “daily noise” of the markets (which includes recommendations by brokerage firms) has not been a good strategy. As the section below shows, Wall Street is heavily biased when it comes to making stock recommendations. Stock Study #1 According to FactSet Research Systems, only 3% of all U.S. listed stocks were considered “sells” as of November 2011.
Stock Study #1
Analysts Ratings for U.S.-Listed Companies
|
|
# of Recommendations |
% of Total |
|
Buy |
13,339 |
45% |
|
Overweight |
2,606 |
9% |
|
Hold |
12,312 |
42% |
|
Underweight |
398 |
15% |
|
Sell |
814 |
3% |
Stock Study #2
According to a Wall Street Journal article (February 2012), historical evidence shows stocks with lots of “buys” from analysts do no better than the broad market, on average. Perhaps this is because analysts give 11 times as many “outperform” or “buy” recommendations than they do “underperform.” New research suggests there may be a way to discern which “buys” are worth heeding.
Analysts S&P 500 Recommendations
|
Buy/Outperform |
Hold |
Underperform/Sell |
|
5,800 |
4,480 |
530 |
Dow 1,339,411