Should you invest in mutual funds or individual stocks?

Stocks

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by Bob Trowbridge

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Fortunately for today's investor, the choice between mutual funds and stocks is one that you don't have to make. In the search for diversification in one's overall investment strategy, stocks, mutual funds, bonds, certificates of deposit, money market accounts, and even savings accounts can help balance risk and returns for the individual investor.

If I were forced to choose between stocks and mutual funds, however, I would have to go with stocks. I will admit, at the outset, that buying and selling stocks is much more time and energy intensive. With a little time and effort, you can choose one or two mutual funds and pretty much forget them.

Stocks, in general, require much more investigation and involve higher risks and promise higher rewards. They involve more daily involvement because changes in individual stocks will affect your portfolio much more immediately than changes in stocks in a mutual fund.

By creating your own portfolio of stocks, you are essentially building and running your own mutual fund. You can create much more diversity than that found in most mutual funds. You are responsible for your choices, for your successes and failures. You will determine the level of risk and the level of potential gain.

I'm choosing stocks because it is necessary that we make a much higher percentage return these days because of inflation and the destruction of the dollar. The inflation numbers coming out of the current administration are basically false. Inflation is much higher than we are told, possibly as high as 10%. If you are making 10% with your mutual funds, you are just breaking even (not counting the incredible shrinking dollar).

Investors must aim for returns that are much higher than 10% to account for inflation, the falling dollar, and taxes. It is possible to get such returns in mutual funds but less likely than with individual stocks. Now that the Feds are dropping the interest rates again, getting decent returns in other vehicles will be impossible.

Do you have to be an expert to make money in the stock market? First of all, the experts don't always make money in the stock market and the current housing market fiasco demonstrates that very well. If not for foreign rescues, some of our biggest banks would be in danger of going belly up because of stupid investment strategies. Some may still go belly up in spite of foreign intervention or government intervention. In the end, we will probably pay for their mistakes.

It is said that investors swing back and forth between fear and greed. Being a successful investor may be less about expertise and more about psychological stability. Successful investors have a kind of Zen detachment and do not get caught up in fear or exuberant greed.

I am a successful small investor. (Which simply means I have made more money than I have lost.) My success was not due to my understanding of markets. It has nothing to do with any specific investment strategy. In my own investigations I learned a lot about economics than investment strategies. I learned about the deceptions of the mainstream media and their "experts." I learned that the economy did not work the way we were told and things that we were told were not important were extremely important.

I studied economists and investing experts who did not go along with the investing crowd. These experts told me about the housing market bust years before it happened. These experts told me that the country was in big financial trouble because of the trade deficit, the spending deficit, the fact that Americans were not saving, that they were spending more money than they were making.

The big shots in Washington were actually telling us that the Asians were saving too much. We were told that a strong economy was based on more and more consumption, more spending. And so we complied. Our economy became based on spending and debt. My experts told me this was a recipe for disaster and we are experiencing that disaster right now. Just prior to the bursting of Greenspan's housing bubble, the man was recommending that Americans take out subprime loans. What a guy!

So in order to be a savvy stock investor, you need to know where the economy is going. Right now, the economy is going to hell in a hand-basket. Now, the talking heads are finally talking about recession and some are even speaking the "D" word, depression. But I have known about this recession for years because I listened to those who looked at the real economy and not the fake economy of the big corporations. The corporations and big banks are weavers of fantasy and they have a reason to inflate the economy. They can take more of our money that way.

So how does an amateur pick stocks that will make money in today's failing market? When the economy tanks, the entire market may suffer. But certain sectors will remain stable and some will go up. Some sectors will go up because of the failing economy, not in spite of it. What sectors might these be?

I have most of my investments in one sector, commodities. What does that include? It includes lots of stuff. In fact it is mostly about stuff, stuff like agricultural products, food on the hoof, lumber, and things that grow. It includes other things that come out of the ground like minerals, oil, gas, and other forms of energy.

These are things that Americans and other parts of the world will need no matter what happens to the economy. As emerging economies like China and India continue to grow, the demand for energy will increase, the need for food and building materials will increase. Meanwhile, the availability of these same things will likely be decreasing. Demand will outstrip supply. This is already happening.

When demand outstrips supply, prices go up. To use oil as an example, demand for gasoline will decrease in America as people have less money to spend. They will travel less and spend more conservatively. But demand in China and India will go up considerably. Also, prices will continue to go up. The same is true of food and minerals, especially metals involved in construction and precious metals.

Why precious metals? Because of the collapse of the dollar and the loss of confidence in governments around the world. Gold and silver have not just increased in value relative to the US dollar. These precious metals have increased in value in relation to all currencies in the world.

So if you want to create your own portfolio, your own mutual fund, look to the sectors that will actually thrive in the negative financial climate we are in. Look to energy, including alternative energy. Look to agriculture, both because of an increasing number of mouths to feed but also because of ethanol production. Look to metals and materials because of continued building around the world. Look to precious metals because gold and silver represent real money when paper money moves toward its true value, which is nothing.

Go to the experts who have disagreed with the mainstream experts for the last six or seven years, the experts who have turned out to be correct about just about everything. Check out 321Gold.com and 321.Energy.com. Also look at Gold-Eagle.com. The commodities bull is still young and with a little bit of research, it can save your bacon (pork bellies) and your shrinking dollars.

Learn more about this author, Bob Trowbridge.
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