Which Is Better- Individual Stocks or Index Mutual Funds?

Many investors rely on individual stock picking for making their investment decisions. This is a fundamental error that many investors make, for they fail to diversify their portfolios properly.

Exxon is one of the biggest companies in the world. However, it only took one intoxicated ship captain to send this stock reeling during the Valdez incident in Alaska a number of years ago. The number one thing that an investor can do for the long term health of their portfolios is to diversify their holdings! Just ask any holder of Enron!

Readers of the Lussenheide Investment Warrior Report will notice that I advocate only using broad based no load index mutual funds. There are a couple of reasons for this. 1) Up to 80% of an individual stocks movement can be attributed to the Overall Market Movement. Like the old proverb goes, "a rising tide will raise all boats". This includes the little ones, the ugly ones, the yachts etc. Stocks are the same way , with the overall market movement being the most significant factor for a stocks movement. 2) When investing in more than just a handful of stocks, the correlation to the overall market as a whole becomes very close. Since this is the case, why bother with the management hassle of a multiple stock portfolio when diversification and ease of investment (as well as the elimination of paperwork) can be achieved. 3) Leverage and enhanced market movement (as used here in the Lussenheide Investment Warrior) can be achieved with mutual funds, whereas this option does not exist for IRA or 401k holders of individual stocks.

Here are some examples of how correlated to a market the size of a randomly selected portfolio of stocks becomes....2 stocks 46%, 4 stocks 72%, 8 stocks 81%, 16 stocks 93%, 32 stocks 96%, 64 stocks 98%, 500 stocks 99%. You can see that even small portfolios soon have the overall market as the primary reason for their gains or losses.

Since one should have a diversified stock portfolio, and since more than just a handful of stock picks quickly renders the idea of individual stock selection a moot point, I recommend broad based index funds along with systematic, mathematical market timing to reduce risk.


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Important Disclaimer:

The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. This document is prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.

The Lussenheide Investment Warrior Report does not advocate trading futures or options. Any mention of commodity futures contracts or options contracts and/or prices in this publication is for illustrative purposes only. This is not an endorsement or recommendation of any commodity futures market nor in margin trading. This is not an endorsement or recommendation of any option market. The risk of loss when trading futures and options is substantial. You can lose more than your original investment.

Any information contained in the Lussenheide Investment Warrior Report and any trading signals from Bill Lussenheide may contain statements that are the opinion of the author. The information and opinions contained in the market letter and signals are believed to be correct, however the information is not warranteed or guaranteed in any way. The subscriber may use the information provided at his or her own risk. No representation is being made that the information will produce trading profits. In no event shall Bill Lussenheide or his family , be held liable for any special, incidental, or consequential damages, whatsoever (including: without limitation, trading losses or any other losses incurred) arising from the use or inability to use the information contained in his  publications, or from delays or failures in the electronic delivery of the publications.