The benefits of investing the old-fashioned way

Most products developed in the past few decades have made it more complicated for the average investor

There is an age-old secret to good investing that has become obscured by so many new financial products and investment vehicles entering the market.

Sometimes complicating what can be a relatively simple process, the bundling of stocks and bonds with other kinds of investment products has become more mainstream in the last 20 years. Investors need to look carefully at exactly what they’re actually investing in.

I started my career working at Smith Barney. Starting in the 1970s, their television commercials would end with, “They make money the old-fashioned way … they earn it.” A lot has changed in the more than 20 years that I have been in the money management business. But, many investors would benefit from investing the old-fashioned way.

My parents’ and grandparents’ generations either invested in individual stocks or individual bonds. Rather than buying shares of mutual funds or investing their money in variable annuities, as many people do today, they would directly own shares of companies or directly own government or municipal bonds.

I remember when clients came into my office during my early days in business, bringing with them stock certificates for the shares they owned or bond certificates for the bonds they owned. Many clients owned shares of the “Baby Bells,” which were the regional telephone operating companies or shares of the electric utility serving their home market. These types of investments were favored because they paid regular quarterly dividends that could be counted on as a long-term stream of income to fund retirement.

Other clients owned municipal bonds backed by the tax revenues of a familiar city or county. These investors took comfort in the notion that the income could be counted on for many years.

Over the past two decades, the investment community has developed all sorts of investment products. Mutual funds no longer just own stocks and bonds, but often hold other alternative investments. Ironically, there are more mutual funds today than there are stocks.

Most of the major banks have developed new investment products, including structured products. These complex products often attempt to earn a rate of return while providing some downside protection. However, the guarantees are usually made by the bank issuing the structured product, and in the past recession, some banks’ structured products lost significant value.

Most of the investment products developed in the past few decades have made the process of investing for the general public very complicated. It doesn’t have to be.

Known quantities

The vast majority of the investing public would be best served by investing “the old-fashioned way.” Trading costs have been reduced so much since the industry was deregulated in 1975 that most of the investment products created in the past few decades are just not needed.

Additionally, many of the newer investment products are expensive. Investing should be all about the returns, not the costs and complexity of the investment vehicle. With low trading costs, a diversified portfolio can be constructed with a relatively small amount of money.

Clients of all ages would benefit from directly owning shares of leading companies.

Like our parents and grandparents who bought shares of companies they knew, like the telephone companies and the electric utilities, why not own shares of today’s leading companies?

The Walt Disney Company has been seeing record attendance at its theme parks. Its movies attract audiences of all ages. And it has been paying a rising level of dividends for decades.

Wells Fargo navigated the financial crisis better than almost all other large banks. It is once again paying out in dividends almost what it paid before the financial crisis, and currently yields close to 3 percent.

Microsoft is under new leadership, and a renewed interest in its business potential has been reflected in its recent share price appreciation. The company generates a lot of cash flow and has been treating shareholders well by consistently raising its dividend, which is currently yielding 2.75 percent.

Investment products have served the banks and brokerages that created them as they are a huge source of revenue and ongoing fees. However, the individual investor needs to make decisions that are in their own best interest, and I strongly advocate investing directly in shares of companies, or when interest rates become more attractive, in individual bonds.

You can start collecting your dividends the old-fashioned way – by investing in the companies that earn them. Either invest on your own or find an advisor who invests this way.

Daniel Cohen, CEO and chief investment officer at Cohen Investment Advisors, Bedford, can be reached at 603-232-8351 or through www.investwithcohen.com.