This article is about regular mutual fund investing (or fund savings), which is a wise and relatively safe way of investing in shares, does not require monitoring of stock exchanges and listed companies, and also generates good returns over the long term.
Investing in shares
Equities have performed well over the long term. Sometimes prices may fall for up to 2-3 years, but in the end they have always risen slowly. In general, global stock market crashes are followed by rapid price falls, while rises are quite slow and cautious from the bottom.
Regular mutual fund investing mainly in equities offers a fairly safe and efficient way to earn a good return on your investment over the long term (say 10 years or more). Historically, starting regular fund investing at even the worst possible time would have yielded a profit in as little as 10 years.
The idea of regular fund investing
Regular fund investing means investing a certain amount of money in a fund at regular intervals so that when the fund price is low, more shares are invested and vice versa. Thus, even if the price of the fund years later at the time of sale is even lower than at the beginning of the investment, the return may have been high. Of course, it is always more profitable to buy a large amount at a low and sell at the peak, but it is unlikely that this will often be the case in the long term, as it is a gamble to anticipate peaks and troughs.
Choosing an index fund
It is impossible to say which fund will perform best over, say, the next 10 years, so you should at least choose one (or even several) that has little or no expenses. These funds are called index funds, which track a specific stock market index. The low or no expenses are due to the fact that the portfolio manager of the index fund apparently does not do much buying or selling in terms of the holdings (shares in companies) of the fund. Such funds usually always invest in the largest and most stable companies. The S&P 500 index fund tracks the US S&P 500 stock market index.
In general, you should choose a fund that invests mainly in North America and Europe, and perhaps also in Asia, with a wide range of sectors represented.
The calculation and graph below explains the idea of regular fund investing in low-cost (or no-cost) index funds.
If somebody had actually invested a particular quantity of money at the start in a fund whose cost had actually gone like this, he would have lost 20% of the cash he had actually spent. If, on the other hand, he had invested the exact same quantity of cash at routine intervals in the same fund, he would have currently earned a profit of more than 10%. Simply put, by acquiring the very same quantity when costs are reduced, you get even more shares and the other way around.
Of course, if you owned an omniscient crystal ball and knew that the stock market would go up every year for the next 5-10 years in a row, then of course you would immediately put all your extra money into the stock market.
The low risk of investing for the long term
The main advantage of regular fund investing over a lump sum investment is the reduction of risk over time. The fact is that no one knows whether stock market prices in general will rise or fall over the next year. An analyst or a bank investment adviser may make analyses and recommendations for different funds, but these are only guesses or hunches about future price movements. Usually, a bank investment adviser will advise you to buy a fund that is going up.
The value of a fund might have increased 30% in the last 6 months, yet in the following 6 months it may fall by the exact same amount. The decline can take place for a very long time and also it can take years prior to the financier also pertains to his detects.
A routine fund investor, on the other hand, has actually purchased a fund for a percentage first, bought much more for the very same amount after a particular time period, and so on. There is no need for much of a surge in basis when investing in by doing this has already yielded a revenue.
Investment diversification over time
Spreading the total amount invested over a long period of time is also a big advantage. If a family has an extra $10,000 a year that should not be wasted on anything (travel, children’s expenses, etc.), it is wise to invest this amount in, for example, an equity fund of €833/month and do the same in future years.
In 10 years, the $100,000 has been invested, but the profit is likely to be the same, calculated at a moderate 8-9 % annual return.
So this $100000 investment has yielded the same amount of money (on which, however, taxes have to be paid). It must be remembered that this sum of 100 thousand dollars would not have been possible to invest (without taking on debt) in the first year of the investment.
Diversification of investments by sector, etc.
The rules for regular fund investment do not apply in the same way to individual shares, as the risk in individual shares is much higher. A company’s share price can fall by 50% to 100% and the company can even go bankrupt. In a diversified fund across industries, countries, continents and high net worth companies, there is no such high risk.
In addition, in direct equity investments, stock performance and the market should be actively monitored. This can be time consuming and often involves monitoring the performance of the companies in your portfolio on a daily basis. For many people, losing trades and a fall in the price of their own shares are a source of great regret.
You have to be patient
Investment guides advise you to buy when the price is rising and sell as soon as it starts to fall. This is often accompanied by the complex issue of technical analysis. Easier said than done. It would be easier to make money if you could always buy at the bottom and sell at the top. In the long run, dilly-dallying knows nothing but high buying and selling costs. Sometimes you make a profit, but soon you make the same amount of loss.
It is true that the biggest gains are made by taking small profits and doing this often enough. Or, alternatively, by picking a stock whose price rises by hundreds or thousands of percent. These things just don’t work for very many people and require close monitoring of stock movements and expertise, as well as good luck. Regular mutual fund investing, on the other hand, requires little or no knowledge of the market or close observation of the market.
The requirements of regular fund investing:
a long investment horizon, at least 10 years (if you have started regular equity investing at a peak, it is very unlikely that prices will fall for 5 years before they start to rise more steadily)
buying shares at regular intervals for a small amount at a time
The benefits of regular fund investment:
lower risk than a one-off investment, price fluctuations allow you to buy more at a lower price
Spreading of the final total investment, even a large one, over a long period of time
the return on investment is not directly affected by falling, falling or rising share prices of the equity fund
investing small amounts at a time: many people do not have the money to invest a large amount at once
over a long enough time horizon, an almost certain way to get a good return on your investment
Choosing the right equity fund
It is impossible to say which funds will be at the top of the yield curve in the next ten years. Instead, we can calculate which funds are affordable in terms of costs. It is not quite the same whether the management costs of a fund are 3% or 0% per year or the redemption fee is 3% or 0%. For example, a management fee of 3% per annum can take up to 20-30% of the final return over a 10-year period, while a management fee of 0.5% takes only a few percent of the same return, depending on the performance of the fund.
Choosing the right fund is not an easy task. As a general rule, however, it is worth investing in a fund(s) that have historically performed at least reasonably well and where the annual management fee is not very high (e.g. 0%-0.6%). Such index funds can be found, for example, in Nordnet’s index funds.
Starting regular fund investment
The timing of purchases is of little importance, as purchases are regular over the long term and it is not easy to time them optimally to coincide with the trough of price fluctuations. However, first purchases should be postponed by a couple of years if there is widespread talk of overpricing or even a stock bubble and if stocks have risen a lot in a short period of time. In the past, major price falls and “stock market crashes” have lasted from a few months to two or three years.
The longer they have been down, the more fund shares you get for the same amount of money, and the smaller the rise in share prices required to turn your investment into a profit. You have the option to buy more often if you believe the price floor is near.
Timing of sales of fund units
As soon as you understand that you need or intend to use the cash invested for a few other function in the following few years, you should begin taking a look at the right time to offer. It is very important to time the sale of fund systems meticulously, as well as sales can be made in a number of tranches. It is essential to time the sale of fund shares to the highest feasible rate, so that at least not too many previous purchases have been made at a greater price than the future sale price.
Normally, the more you determine from the peak rate, the less revenue you will certainly make, considering that you have also gotten shares at the peak cost and also the overall quantity spent has actually expanded for many years. A drop of simply a few percent from the peak can mean an earnings of as much as 10-30% much less, depending upon the price movements. Generally of thumb, if after years of conserving the fund price falls greater than 20% from its peak, it is worth (if possible) remaining to acquire, waiting until the price has recouped from the trough as well as selling when the surge has lasted a minimum of a couple of months or the fund rate has also gotten to a brand-new height.