John R. Bullis: Consider stock index funds | NevadaAppeal.com

John R. Bullis: Consider stock index funds

John R. Bullis

Investments in large company common stocks can be done in many ways. You could buy individual company stocks, you can buy a mutual fund that invests in that kind of stocks (and others), or you could buy an index fund.

Many buyers of mutual funds suffer losses when the market takes a dip down and they panic and sell at a low price. Later, when the fund values come back or go higher is when they buy back in (or never reinvest at all). Selling the mutual fund at the low point and buying at the high point of values is not going to be good in the long-run. The costs of buying and selling can be expensive for you, not so bad for the broker that usually gets a commission on each transaction.

Index funds buy many or all of the securities (stocks) that make up a market index, such as the S&P 500 (the biggest 500 stocks traded on an exchange). That is one way to diversify, buying stocks in many different categories. If you can hold on during a price downturn, history shows the values of the fund will come back and over time increase.

Good large company stocks that pay dividends have been popular and a benefit for many long-term type investors. There are index funds that only invest in those companies. The dividends can be 2.5 percent of the stock price, or more. That is certainly more than you can earn in the bank currently. The good common stocks tend to increase at least as much as inflation. That protects your purchasing power.

The stock market goes up and down and up again. Warren Buffett supposedly purchased Coca Cola stock 40 years ago and still owns it. In the meantime, he has not paid any commissions for selling or buying that stock and the dividends are favorably taxed (low tax rate). The problem is to avoid the panic selling. If it is a good company, it can still have a price reduction on some sort of “bad” news. After awhile, the price will usually come back and even continue to increase.

There are several index funds you can consider. Most charge very low fees. Say maybe $14 a year for their expenses of operation for each $10,000 invested. That is much less than active mutual funds that choose to buy and sell on a regular basis. The low fees help make the total returns on index funds more than most actively traded mutual funds over a five or ten year time period.

Yes, some folks invested in a particular company or mutual fund only to panic and sell when the price goes down. They sometimes say, “Never again will I invest in stocks,” only to return to the low earnings of savings accounts or bonds. If it is still a good company, it is better to “grit your teeth” and continue to hold (not sell).

Did you hear? “The successful man or woman has a guiding vision, a dream, a sense of focus. He or she has a clear idea of what he or she wants to have, do or accomplish. It is the achiever’s divine right to dream.” — Dennis Kimbro.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years.

He is founder emeritus of Bullis and Company CPAs.