Thursday, April 17, 2008

Mutual Funds 1 - Before we begin

Ok here we go - $ make $.

Keep in mind, any $ put into any investments should be treated as "gone" / "untouchable" for at least 3 years. This doesn't mean that you can't sell down and reallocate to another asset / investment, ya ;P

I'll start off with mutual funds as most people think of stock investments as "high risk". By the time we're done, I hope you'll think of risk as managed risk, not just plain vanilla "high risk" "low risk". Just an aside - is driving "high risk"? Yes it is - if a blind untrained monkey is driving! If Michael whatshisname is driving, can you consider it low / managed risk? It all depends on the experience, knowledge and skills ya.

Mutual funds - what are they?
"Mutual", a simple view
- you, me + some others (well, a lot of others) collectively put our investment $ together, appoint a manager or managers to buy/sell stocks, bonds, money market, derivitives on our behalf. The manager(s) have to follow certain guidelines and will be audited/checked on by a third party.

A mutual fund has 3 parties involved:
- Investors (you, me + others invested in the fund)
- The Fund Management Company that buys/sells / asset allocate stocks, bonds, money market, derivitives for Investors
- The Trustee that checks and audits the Fund Management to ensure they comply with the Fund's directives / policies (each fund have their own policies /directives as part of their investment strategies)

Strengths of Mutual Funds:
+ Easy Diversification
+ IF Balance Fund (a fund that allocates 60% into Equities, 40% into Fixed Income instruments) used, do not need to actively asset re-allocate
+ Available asset classes are Equities & Bonds
+ Auto-cruise, plonk $ in and forget

Weaknesses of Mutual Funds:
- Relatively high cost of investment if cash is used for equity funds. Ranges between 5% to 8%! This means every $1 I put in, I get only $0.92 to $0.95 value at the start compared to stocks bought at EOQ (Economic Order Quantity - where the amount hits a low based on the brokerage cost) which is approximately 0.6% one way, thus two ways (buy/sell) approximately 1.2%+
- No direct control over what is invested in

I personally leverage mostly on my EPF a/c1 to invest in mutual funds as the charges are only 3% and since I can't touch my EPF $ until 55, leveraging on mutual funds is a near sure bet to beat EPF's 4.9% average returns pa. (since 2000 to 2007) .

Cash-wise, I use a Dollar Cost Averaging + Value Cost Averaging approach and only invest in foreign focussed mutual funds as EPF currently (mid 2007 onwards)disallow investments into foreign related mutual funds.

In whatever investments, huge lump sum investments should not be done. eg. if I inherited $200,000, I'll aim to invest the whole sum within 2 to 3 years, each month a specific amount put aside and invested using Dollar Cost Averaging + Value Averaging for Mutual Funds and Fundamental + Technical approach with Cash & Risk Management for Stocks.

Why 2 to 3 years? That's how long (statistically) a country falls and crawls out (Break Even, ie. no win, no lose) of a recession/depression. Longest I read was about 3 years in USA.

My investment approach is statistical and probability based. Like casinos - the long run game will get you $ even if the probability of winning is only 55% or 60%. Long run! That's why casinos make the $ and gamblers often lose in the long run.

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