Mutual Funds: Why We Need Them.
Mutual Funds get a bad rep from individual investors, myself included. “Each man thinks his horse is the fastest.” A lot has been going on in the Entrepreneurial sphere. There was once a time when it was the riskiest of things to start a business or to be an Investor. With the rise (after it’s 2000 fall) of the Internet and the success of numerous Hedge Fund Managers, it has become “the thing to do”. Authors such as Gary Vaynerchuk, Peter Thiel and Robert Kiyosaki have caused us to gain more confidence in pursuing business ambitions. No, this article is not about Entrepreneurship. However, a lot of Entrepreneurs look down on the middle class, pitiful robots we say. Others in the investing sphere discourage taking a typical 9-5 and investing in mutual funds. Not until recently, did I swear by the practice of buying my own stocks rather than fattening the institutional investor’s purse. I have gained some wisdom it would seem. I had to take a deeper look into the matter and have now adopted a more objective view point.
Here are five reasons we need mutual funds. In an upcoming article we will explore Who Should Buy A Mutual Fund.
1. Better to Invest in Mutual Funds than to SAVE
I often hear my father speak of how things are getting expensive. By the same token, he often compares today’s prices to those during “his day”. He would say, “Boy, in my day $100 could buy….” and he would proceed down a list, “…today you can only get a…” I later found out that it wasn’t that things got more expensive but that the buying power of money is decreasing. There’ll be a video on the YouTube channel explaining this in detail. Essentially though, the government is printing more money, making money less valuable. Think of how the price of tomatoes falls when tomatoes are in season. Well, effectively money is always in season and in increasing supply.
As such, money saved in a bank account (or under our beds) wherever, is continuously becoming less valuable. Over time, it is able to buy less and lesser “stuff”. The financial institutions know, and fully understand this. They invent “investment products” that will give us a rate of return above, though only slightly above, the rate of devaluation. Additionally, banks are no longer giving us interest on normal savings accounts, instead they all offer us mutual funds for ~5.0% per annum (p.a.). It is therefore better to invest in those Mutual Funds than to save money.
2. Not Everyone Has The Time to Study Stocks
We must remember that not all professions are created equally. Although we all have the same amount of time within a day, not everyone has the opportunity to read five news papers and the latest quarterly report. Furthermore, I want my doctor to spend his time learning how to save my life, not watching charts and studying pricing patterns. Securities dealers also recognize this, and so they created Mutual Funds. These products allow professionals such as Accountants, Doctors, Engineers, and Lawyers to invest passively. In actuality, when most professionals say they “invest” they normally mean that they are contributors to a few mutual funds or unit trusts.
3. The Novice Investor Should Buy Mutual Funds First.
Okay, say I want to be an Investor, I have $10,000.00 and I don’t know which stock to buy. I have never bought a stock and I don’t know what a dividend is. Well, when that was my situation, the first thing I did was to buy shares in a mutual fund. I then started my studies. I advocate buying Mutual Funds and earning while you learn the finer details of the stock market. There is a very simple rationale to this. It follows from the point number one. I would prefer put my money in mutual funds rather than save it. I would also prefer that you put your money into mutual funds while you study stocks, bonds, silver, gold or oil as investment options. This was what I did, in this way, I was able to earn interest on my money while I learn how to manage my money myself.
4. Build Up Emotional Fortitude
Markets inevitably fall. A close look at the performance of many companies will show a cyclic pattern over any 5 year span. When you own mutual funds you get to build up emotional resilience to the never ending waves in the market. I remember how my heart skipped a beat after I looked at my portfolio I had put $20,000 in and saw it being worth $19,980. I was frantic… “I’m loosing my money”. I then spent every day for the next month watching the balance like a hawk. I suggest buying mutual funds first such that when you eventually start buying your own stocks , you will neither loose sleep when you see the price of your stocks drop by 10% in one trading day nor get overly ecstatic when the reverse happens.
5. That Rich 80 Year Who Started Investing In Mutual Funds at Age 30
If you have not read the book, “The Automatic Millionaire”,by David Bach, then I strongly suggest you do. It helped me to fully appreciate mutual funds. The content will be outdated in some instances since, it is very difficult to find a mutual fund that will pay 10% per annum consistently. However, the fundamental concept of the book remains true. You can “strike it rich” by investing substantial amounts in reputable mutual funds over long periods of time.
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