ARBOR WEALTH: Stock picks, mutual funds, and The Electric Horseman

“Somehow I think them experts ain’t so expert.” Robert Redford as Sonny Steele in The Electric Horseman

The Electric Horseman is a silly little dramatic comedy from 1979, starring Robert Redford and featuring Willie Nelson in his first major acting role. Sonny Steele, played by Redford, is a former five-time world champion rodeo cowboy who now hawks Ranch Breakfast cereal. The corporation which owns Ranch Breakfast and employs Sonny Steele also owns Rising Star, a multi-million dollar stallion. 

But the corporate horse handlers are shooting Rising Star full of steroids and barbiturates so the animal can be paraded on stage in Las Vegas at the corporation’s press revue. Steele, realizing that Rising Star is injured and drugged, rides the horse out of the casino hotel, down the strip in Vegas, and out into the mountains of Nevada. His goal? To restore the horse’s health and release Rising Star into a canyon with other wild horses.

Prior to Steele’s horse thievery, he argues with the corporation president about the treatment of the animal. The executive assures Steele that the horse is under expert care. Steele replies, “Somehow I think them experts ain’t so expert.”

Many investors and advisors feel the same way about opinions offered by mutual fund “experts.” Mutual funds are essentially a packaged group of individual securities. One advantage of mutual funds is that the investor is less susceptible to significant loss, since the fund is diversified.  

A valid criticism of mutual funds is the inherent layers of shareholder fees. For example, many mutual funds charge 12b-1 fees, which are expenses related to the distribution and marketing of the fund. Broker commissions and advertising, for example, would be paid by 12b-1 fees. In addition to 12b-1 fees, there are management fees, administrative fees and operating costs to be paid by shareholders.

An alternative to consider might be to choose individual securities and essentially build your own mutual fund. Many investors and advisors choose this route.

At one trading custodian, it’s $8.95 to buy a stock, and $8.95 to sell it, and those are the only costs associated with owning it. That’s a lot less expensive than buying a Class A, front-loaded mutual fund.

So how can an investor know enough about individual stocks to serve as his/her own stock picker? You work at it. You rise early each morning and study the activity of the overseas markets. You read incessantly about economic trends and global market interactions. You learn which equities have historically risen in value and have periodically increased their payouts to shareholders over time. You analyze a company’s underlying fundamentals.  

It’s much more difficult and complicated than simply buying a bunch of mutual funds, but the long term payoff may be worth it.

Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.