Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Today's Strong Sells

There need to be more "sell" and "strong sell" ratings on stocks for the ratings to have any meaning. For the most part, if you look over how the Wall Street analyst community rates stocks, the ratings completely inhabit the narrow range of "neutral" to "strong buy."

Yet there are so many areas where a good "strong sell" rating would help investors immensely. The kind of help that might put, oh, about $40 billion or more annually into the pockets of investors.

Here's an example of a much-needed "strong sell" rating. There's a new study out (link opens PDF file) titled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry." It's the most detailed work ever conducted comparing the record of financial advisors to those who make their own mutual fund purchases.

Here are the results for returns from 1996 through 2002:



Financial advisors:


Individual investors:


*Raw returns, net of all expenses. Includes bond and equity funds.

The study measured the results of literally trillions of dollars of mutual fund purchases, including the most well-known and trusted names in the industry. The study demonstrates that Wall Street's brokers don't find better-performing funds than individuals, don't allocate assets among different asset classes better than individuals, and don't display fewer biases toward the "hot" stock than individuals.

Every honest financial advisor needs to start issuing a "strong sell" rating to the world of managed mutual funds. But don't expect that to happen anytime soon -- not with $40 billion (yes, that's billion) going to brokers and mutual fund managers every year from sales fees and management costs.

Where's the strong buy?
To the extent that mutual funds have any true benefits, they can provide investors with a diversified portfolio. But you can create that diversification directly by owning the same stocks that mutual funds own, at a fraction of the annual cost.

To begin to get the right diversification, become aware of the major divisions of stocks, as defined by the Global Industry Classification Standards (GICS):

  • Energy
  • Materials
  • Industrials
  • Consumer discretionary
  • Consumer staples
  • Health care
  • Financials
  • Information technology
  • Telecommunication services
  • Utilities

A portfolio with the greatest possible diversification benefits can be built by owning about two companies from each of these classifications. Here's an example. I've selected companies with low-ish price-to-earnings (P/E) ratios and high-ish returns on equity (ROE) relative to the industry averages. That combination of factors has historically produced better-than-average returns:






Apache (NYSE: APA  )








Stanley Works (NYSE: SWK  )



Consumer discretionary

Fossil (Nasdaq: FOSL  )



Consumer staples

Unilever (NYSE: UN  )



Health care





Franklin Resources (NYSE: BEN  )



Information technology

Seagate Technology (NYSE: STX  )











Data from Capital IQ.

There's a lot more to learn about companies than their P/Es and ROEs. A more in-depth understanding of companies will give you a chance to not only equal the market's returns (which you have virtually no chance of doing with managed mutual funds), but surpass them. At Motley Fool Stock Advisor, we have a five-year track record of beating the market with our recommendations; more important, we educate our members about how to do so on their own. If you'd like to try out the service with a totally free 30-day pass, be our guest.

This article was originally published Feb. 2, 2007. It has been updated.

Bill Barker does not own shares of any company mentioned. Unilever is a Motley Fool Income Investor recommendation. Landec is a Hidden Gems selection. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 660951, ~/Articles/ArticleHandler.aspx, 5/26/2016 4:36:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,828.29 -23.22 -0.13%
S&P 500 2,090.10 -0.44 -0.02%
NASD 4,901.77 6.88 0.14%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/26/2016 4:02 PM
APA $58.03 Up +0.12 +0.21%
Apache Corp CAPS Rating: ****
BEN $37.03 Down -0.46 -1.23%
Franklin Resources… CAPS Rating: *****
CI $128.87 Down -0.43 -0.33%
Cigna Corporation CAPS Rating: ****
FOSL $27.56 Down -0.56 -1.99%
Fossil CAPS Rating: ***
STX $21.55 Up +0.07 +0.33%
Seagate Technology CAPS Rating: ****
SWK $113.62 Down -0.59 -0.52%
Stanley Black & De… CAPS Rating: *****
UN $44.95 Up +0.43 +0.97%
Unilever N.V. (ADR… CAPS Rating: *****