Usefulness of investment funds (to the defensive investor) are as written but not limited to:
- Promote good habits of savings and investment
- Protected individuals against costly mistakes in the stock market
- Income and profits from stocks are aligned with overall returns from the market
- Comparatively, it is estimated that the average individual who put his money into investment fund shares has fared better than the average person who handles his own investments
- This extends to investments in mutual funds, exchange traded funds etc
- Ask oneself if better than average results can be assured by choosing the right funds, performance funds?
- If not, how can one avoid choosing a fund that will garner worse than average results?
- How to make a decision between the different types of funds?
- Does the fund's performance justifies all fees required by the fund in handling your money?
- The stock picked by funds does not justifies the high cost of research and trading
- A fund's expenses is inversely related to its returns
- The more frequent a fund trades its stocks, the less it tends to earn
- Highly volatile funds are likely to stay highly volatile
- Funds with high past returns are unlikely to remain winners for long
There are a few reasons why fund's superior performances do not last forever and these factors are self explanatory:
- Migrating managers due to some form of poaching
- Asset elephantiasis
- Rising expenses, including trading and administrative expenses
- Sheepish behavior, also known as herding (following behavior) since fund managers do not want to look stupid if they did not ride on a profit opportunity while other fund managers did
Buying into an index fund could be one of your wisest investment
As shown from the various factors behind a fund's lacklustre performance, it would be wise to purchase an index fund via dollar cost averaging. This way of investing has been advised by both Benjamin Graham and Warren Buffett due to an index fund's low expenses. For example, a typical stock fund incur operating expenses of 1.5% and trading costs of 2% while an index fund incur just 0.1% in trading costs and 0.2% in expenses. Moreover, their long term returns usually beat the returns of many stock funds.
The only demerit behind index fund is that they are boring and one cannot go around boasting about how they are owing one of the most spectacular fund to their friends and families. Yet, by buying into an index fund, one is guaranteed to beat the vast majority of investment professionals and individual investors alike.
A good fund (beats the index) usually has the following characteristics:
- Managers are the biggest shareholders of the fund
- The fund tends to be cheap (not all expensive funds are superior performers)
- The fund manager dared to be different (prevent herding)
- The fund is shut to new investors (to prevent asset elephantiasis)
- They do not advertise (Plato said in The Republic that the best rulers are those who do not want to govern)
Know when to sell your fund by taking into account of these few phenomena:
- A sharp and unexpected change in strategy ("value" fund loading up technology stocks or "growth" fund buying blue chips stocks)
- An increase in expenses
- Large and frequent tax bills as a result of irresponsible trading
- Sudden abnormal returns like a fund losing excessively or winning spectacularly when it has previously been getting conservative returns
One should never buy or sell solely based on the recommendations received from financial service firms like investment banks, financial research firms etc. Instead, the role of the financial service firm becomes more of a knowledge provider in helping one make investment decisions.
Seek help for your investment portfolio under these situations:
- Tremendous losses (compare with the market average)
- Failed budget plan
- Widely diversified portfolio (a diversified portfolio is good, before you start placing every stock inside)
- Major life changes like having sick parents, a new child
A security analyst will apply standards of safety as shown below accordingly:
- Past average earnings
- Capital structure
- Working capital
- Asset values
Apply the "poorest-year" test for a wise selection of bonds in your investment portfolio
- General long term prospects
- Financial strength and capital structure
- Dividend records
- Current dividend rate