Mutual Funds-Corporate Farming

If investing should be like farming, what if we really don’t want to be farmers? What if we want to own the land but let somebody else do the farming and produce rising income for us?

Delegation to professionals with more experience, judgment and tools of the trade is almost always a wise decision. This of course assumes that the professionals charge a fair price, where the value they provide exceeds the cost of their services—and they are competent.

Owning and working a 1000 acre farm can be a good source of income. Owning and renting out a 1000 acre farm can provide a modest income. What if we want more income than we can get from renting, but we don’t want to work the farm ourselves? And, what if we want to diversify our holdings so all of our “land” is not in one place and so we can grow many more different types of crops?

When we buy shares in a mutual fund, we are buying an ownership interest in an investment company. We share in the income generated by that company. Using the farming analogy, we can buy shares in a “corporate farm” with vast “land” holdings in many geographical areas, with a diverse group of crops, providing the benefits of diversification. The benefits of a mutual fund are primarily: Professional Management; and Diversification.

The goals and general activities of the mutual fund are outlined in a prospectus. Never invest in a mutual fund without reading the prospectus and gaining a complete understanding of the fund’s goals, activities, management, costs, financials and track record. (Have a professional assist you.)

Because the mutual fund has professional management and more resources, it can often add another dimension to your investment activities. Here, ongoing income from Capital Appreciation is perhaps possible by buying “land” when it is cheap, and selling it later when prices for it have risen. In other words, the management is not only engaged in the business of farming and producing income; they are engaged in a professionally managed form of “land speculation”. Unfortunately, many of these professional managers have no better idea of how to make money buying and selling land than the average Joe or their fees are so high that any value they add is more than offset by the costs.

So, how do you choose?

Our firm believes the right choices are finding mutual funds with competent management, with the right philosophy, that spend their time on truly value adding activities, and that keep their costs low. We define competent management as having sufficient experience to have learned the lessons of the past; that understand following the crowd is usually unwise. We define the right philosophy as a focus on managing risk: capturing “less of the downside” and “more of the upside” but not necessarily all of the upside in fluctuating markets. (You would be surprised how many mutual fund managers think doing a good job is simply following the market-up AND down!) The right philosophy also includes an understanding that it may take years for the wisdom of their decisions to show. Finally, there is only one way to gain an advantage in buying and selling property—real “in person” inspections of the property. The same type of in person inspections you would undertake yourself. There are remarkably few mutual funds that meet our firm’s criteria for being the “right choice”.

With professional management and the potential for the added dimension of “harvesting” long term gains from Capital Appreciation, a professionally managed, highly diversified portfolio can produce a relatively stable long term source of rising income. In many cases this rising income can be more predictable.

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.

See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.