Hardly a week goes by anymore when some big-name stock doesn’t start trading like a mutual fund.
Nearly 500 domestic and international stocks are now available directly to investors, sold straight from the company without a sales charge and providing monthly statements just as you might expect from a no-load mutual fund.
That’s enough available “no-load stocks” to build a decent portfolio, and the growth of direct-purchase stocks raises an interesting question for the do-it-yourself investor, namely, “Who needs mutual funds when you can get the stocks yourself?”
That question puts a scare into the fund industry, which would like to believe that its products are the best/only way for most investors to go. But stocks and funds can co-exist in most investment portfolios, and anyone who can research and select funds may want to dabble in direct-purchase stocks.
“If you are comfortable making your own investment decisions and doing your own research, direct stocks can be a real alternative, or addition, to mutual funds,” says James J. Volpe, vice president at First Chicago Trust Co. of New York, the transfer agent for many of the direct-stock offerings. “Each type of investment has its advantages and many people may want to use both options in their portfolio.”
Direct-purchase stocks function virtually the same as a mutual fund. You contact the company (or its transfer agent), fill out an application and mail in a check. As with funds, you invest whole dollar amounts, which is fully invested down to the fraction of a share, rather than purchasing a set number of shares from a broker. In many plans, accounts can be opened for a few hundred dollars.
You can even get phone withdrawals, automatic investments and dividend reinvestments, just as you can with most funds.
The advantages to direct-purchase stocks include the cost of ownership, superior ability to avoid tax liabilities and the sense of accountability that comes with making decisions rather than having a professional manager do it for you.
Direct-purchase stocks typically charge fees for initial purchases ($10 to $15), additional purchases (capped at $3), reinvesting dividends (topping out at $3) and for selling out. Many of these fees are waived if you set up automatic monthly investments. Actual fee amounts depend on the individual plan.
For a complete list of available direct-purchase stock plans, check out www.netstockdirect.com, or call The DRIP Investor/No-Load Stock Insider newsletters at 800-233-5922.
If you are a buy-and-hold investor, those fees look pretty good compared to funds. Hold $10,000 in a mutual fund with a 1.25 percent expense ratio and you sacrifice $125 per year to the manager; in a direct-purchase stock, you most likely would avoid fees altogether unless you make trades.
The tax issue is important, too. A fund that realizes capital gains during the year must pass those winnings to investors, who owe taxes on what they receive; stock investors decide if/when to sell and unlock their pent-up gains. Taxes can be delayed.
As for accountability, that comes from knowing more about a stock than a fund. Most investors have a limited knowledge of what their fund buys and sells, but have a great awareness of what Exxon, Coca-Cola, or Wal-Mart is all about.
“When people talk about mutual funds, performance is all that matters,” says Mary K. Sullivan of Protected Investors of America in San Francisco. “When people talk about stocks, performance is second or third. The first thing people talk about is, `Where is the company at and where is it going?’ They have a better sense of what is happening, good or bad.”
But individual stocks have a downside, too. For starters, the universe of about 500 stocks is not that big. You can forget about building a diversified portfolio of small- and micro-cap stocks. And, not unlike funds, many available issues simply aren’t worth buying.
Next, recordkeeping for no-load stocks can be a burden. With eight to 20 issues in a diversified portfolio, your mailbox will be flooded with monthly statements and you could have tax paperwork headaches when you sell. Also, direct-purchase stocks typically are not set up for use in retirement accounts.
But most important is the idea that professional management of a diversified portfolio at a reasonable cost is why many investors turn to funds in the first place.
While many experts agree that it is easier to pick one winning stock than a great mutual fund, picking a portfolio of good stocks to diversify your holdings is mighty tough sledding. If you don’t diversify enough, you face increased volatility.
That’s why a fund/stock mix offers flexibility.
“You can reach all of your financial goals with mutual funds, but you can supplement those investments with stocks that you buy on a no-load basis,” says Michelle A. Smith, managing director of the Mutual Fund Education Alliance. “For a knowledgeable investor, that can be the best of both worlds.”
———-
Charles A. Jaffe is mutual funds columnist at The Boston Globe, Box 2378, Boston, Mass. 02107; e-mail jaffe@globe.com
