Commentary > Sivy on Stocks
Sivy's Mailbag: Stocks vs. Funds
Also: Should you be buying bonds? Do stock buybacks matter?
November 14, 2003: 2:32 PM EST
By Michael Sivy, CNN/Money contributing columnist

NEW YORK (CNN/Money) - I've been covering the stock market's ups and downs for more than 20 years, mostly in the pages of Money magazine and, for several years, as a columnist for this website.

If you've followed my work, you probably already know that I advocate a systematic, rational approach to conservative investing that minimizes risk while offering a strong chance to earn superior long-term returns.

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Specific strategies may differ from investor to investor. But there's no doubt that this point, you should be participating in some way.

If you buy large, established blue chips in a diverse group of industries, you'll enjoy all the advantages of an index fund. You won't incur annual fees and you'll be able to time your tax liabilities -- whereas many mutual funds distribute taxable gains each year, investors who own individual stocks don't incur any tax liabilities until they sell.

In addition, I believe that through careful, value-conscious stock selection, you can get an edge on the market.

I'm glad to be back in the editorial rotation here on CNN/Money, writing on Tuesdays and Thursdays. My Thursday column will usually take a Q&A format, with questions coming from readers of my new subscription newsletter Money Portfolio Advisor Plus.

Here's a brief look at what my readers are asking about now.

Q: Why do you advise owning stocks rather than mutual funds?

A: Funds are ideal for investors who are just starting out, even now, when the fund industry is under government scrutiny.

Anyone who is unsure or afraid of being in the stock market should open an account with a no-load mutual fund company that offers an established S&P 500 index fund -- and add money to the fund at regular intervals.

That will get you 85% of the benefit of owning stocks with a minimum of effort or angst. But more experienced investors can do better by purchasing individual stocks.

For starters, if you're a long-term investor, brokerage commissions will cost you less than annual mutual fund fees over a decade or longer.

Second, owning individual stocks gives you more control over what you sell and when you sell it. You can, for instance, easily lower your risk by selling high-P/E stocks if the market looks rocky. And since you're usually taxed only when you sell a stock for a capital gain, controlling the timing of your sales can help minimize your tax liabilities.

Finally, I believe that if you establish a buy list and follow the stock on it, waiting for value opportunities, you can boost your returns a bit above what an index fund returns. And thanks to compounding, over long periods of time even a slightly higher annual return will add greatly to your long- term results.

Q: Is there any reason to buy bonds now?

A: Income investments should still play a part in your total portfolio, but Treasury bonds are less attractive than they've been in a long time. The superior returns that most bonds have earned in recent years were the result of a long-term decline in interest rates from double-digit levels in the early 1980s.

But with inflation now as low as it's likely to go, interest rates should rise as the recovery proceeds. That means Treasury bonds are likely to provide poor returns.

Investors should consider alternatives, including high-yield stocks, real estate investment trusts and preferred shares.

Q: How beneficial is it when companies buy back their own stock?

A: Companies that regularly buy back their own shares can outpace comparable stocks by as much as three or four percentage points a year, on average. In simplest terms, buybacks ensure that earnings -- and earnings increases -- are divided among a smaller number of shares.

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In addition, repurchases are typically a sign that a company's top managers think the stock is undervalued. But there are a couple of things to watch out for.

Buybacks are only beneficial if a company can repurchase shares without borrowing heavily. In addition, many companies announce repurchases but fail to follow through on them.

Buybacks can confirm good fundamentals, but it's still the fundamentals that matter. When I profile stocks, I'll mention any buybacks that are under way if they're large enough to be significant.

Michael Sivy is an editor-at-large for Money magazine. Sign up for free e-mail delivery of Sivy on Stocks every Tuesday and Thursday.  Top of page

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