Q: My stock portfolio is in the lower seven figures. Should I stay with mutual funds or switch all or part of my portfolio to individual money managers?
A: Individually managed accounts and mutual funds are two of the most popular methods available to access professional investment managers and create wealth. Both offer investors a professionally managed portfolio of securities (generally stocks, bonds, or a combination of the two) and offer diversification as a means of reducing overall volatility and risk.
Although private accounts and pooled accounts are similar in some respects, they are two distinct vehicles with advantages and disadvantages. Determining which approach is more appropriate depends on your individual needs. However, you are wise to research the difference because what was appropriate for you right out of your residency and with limited resources may be inappropriate for you now. You could be missing opportunities that only larger portfolios could afford you.
We first define the difference between these two avenues of investing.
What is an individually managed account?
The larger account size allows a portfolio manager to diversify without pooling the account with the assets of other investors, as in the case of mutual funds. Individuals with private accounts own the securities directly versus owning shares in a fund. Like a mutual fund, the portfolio manager has complete discretion and follows a stated investment strategy the client and financial advisor have already determined is appropriate.
What is a mutual fund? A mutual fund (or pooled account) is a company that invests in stocks, bonds, and/or other securities on behalf of a group of investors with similar financial goals. Mutual funds are essentially cooperatives of investors who pool their money for a common purpose. The average minimum investment in a mutual fund can be $1,000 or even lower in some cases.
This pooling approach allows small investors to gain access to both professional management and diversification. The fund draws from the pool not only to make investments but also to pay for the transaction costs and the services of a fund manager who decides when to buy and sell securities for the fund based on its stated objective.
Mutual funds may be accessed with or without an initial or deferred sales charge. For investors who choose to work with a financial advisor, a commission or ongoing fee is charged.
The deciding factors
Direct ownership of securities:Many investors prefer to own the securities in which they invest. It is often gratifying to pick up a newspaper and read about a new product or solid earnings report from a company of which you are a shareholder. Even though mutual funds provide investors with the list of securities they own, the information is typically given only twice a year and therefore may be outdated.
Also, since an individually managed portfolio is separate from other accounts, an investor may specify certain industries or businesses in which they do not want to invest because they find them objectionable.
Control of investment flows: The word "mutual" often denotes commonality, such as mutual benefit or mutual understanding. Investors frequently have different views with regard to the best investment or overall direction of the market. They may react to a situation differently from another shareholder.