I was talking to a friend from high school recently about the stock market, and asked him what stocks he was investing in these days. My friend, who is probably the smartest person I know and an extremely savvy investor, told me he was no longer investing in stocks, but mutual funds. Based on the success he’s had investing in equities, I found this surprising.
He had just told me a story about how he had bought shares of Federal National Mortgage Association (FNMA) near the bottom in 2008 as a play on the eventual rebound in the U.S. housing sector. To cover his bases, he later hedged his investment in “Fannie Mae” (as it is more commonly known), with a $40,000 investment in American International Group (AIG), which at the time was one of America’s largest mortgage insurers.
Turns out he was right on both counts: though FNMA has never recovered from its recession-induced downward spiral, it has made enough strides in the last decade or so for my friend’s investment to more than double. His AIG investment also doubled—he sold out of it late last year, before it started to tank.
Those aren’t my friend’s only huge successes investing in stocks. He bought several other mortgage insurance stocks after the recession, including MGIC Investment Corp. (MTG), which is up 10-fold since the stock market bottom in 2009.
So, my question to him was, “If you’ve had all this success investing in stocks … why on Earth are you now turning your attention to mutual funds?” Mutual funds, after all, come with higher fees, have a long history of failing to beat the market on a consistent basis, and give you less control over your own investments.
Yes, investing in one mutual fund offers more diversification and less risk than investing in stocks. But as we constantly preach here at Financial Freedom, you can limit the risk of investing in stocks by limiting your losses to no more than 10-15% on any one stock.
Besides, when you’re an individual investor who’s already had plenty of success investing in stocks, there’s no need to abandon that strategy. After all, my friend had tons of examples of winning stocks, but zero examples of winning mutual funds from his years of investing.
It’s just one anecdote. Surely there are plenty of investors who have stuck to mutual funds and done just fine. But if you’re going for more than “just fine”—to earn the kind of profits on one investment that my friend did with FNMA, AIG and MTG—then investing in stocks is your best bet. And if you simply don’t have enough time to do the research on your own, let us do it for you!