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Re: Picking Stocks like Gambling?
Mutual Fund is good for people who have little care or time to learn about the stock market and want to pay someone anywhere between 0.50% to 2+% fees. But most fund managers underperform the market averages. On the other hand, you get instant diversified portfolio. If you put in some effort to learn about the market, you can outperform most mutual funds.
It is very difficult for mutual fund managers to beat the market by design. They get a huge inflow of funds at the top of the market. Most investors wait to see market rising before adding additional capital, or investing. Almost always, that is the top of the market. Mutual funds must invest all the incoming cash as their mandate allows only certain percentage to be held as cash. Also, mutual funds cannot short, so fund manager must buy overpriced securities.
On the downside, things work reverse. When investors see market declining, they start liquidating mutual fund positions. Inevitably, mutual fund manager must sell securities to meet the redemptions. Many times, these are times when assets are cheaply priced and should be purchased. Then, fund manager takes his cut of fees, further reducing returns for investor.
Indexing has been popular of late because so fund managers' inability to keep up with the market due to above limitations. However, problem with indexing is that by nature, index contains good investments along with bad investments to show market averages. By selecting just good companies with solid fundamentals, anyone can create a portfolio that will beat any market averages long term.
About only time I use mutual fund is when I invest overseas and cannot purchase directly, or direct purchases would be too expensive. Up until few years ago, brokerage commission was prohibitively expensive for individuals but with discount brokerages, this barrier is eliminated.
Mutual Fund is good for people who have little care or time to learn about the stock market and want to pay someone anywhere between 0.50% to 2+% fees. But most fund managers underperform the market averages. On the other hand, you get instant diversified portfolio. If you put in some effort to learn about the market, you can outperform most mutual funds.
It is very difficult for mutual fund managers to beat the market by design. They get a huge inflow of funds at the top of the market. Most investors wait to see market rising before adding additional capital, or investing. Almost always, that is the top of the market. Mutual funds must invest all the incoming cash as their mandate allows only certain percentage to be held as cash. Also, mutual funds cannot short, so fund manager must buy overpriced securities.
On the downside, things work reverse. When investors see market declining, they start liquidating mutual fund positions. Inevitably, mutual fund manager must sell securities to meet the redemptions. Many times, these are times when assets are cheaply priced and should be purchased. Then, fund manager takes his cut of fees, further reducing returns for investor.
Indexing has been popular of late because so fund managers' inability to keep up with the market due to above limitations. However, problem with indexing is that by nature, index contains good investments along with bad investments to show market averages. By selecting just good companies with solid fundamentals, anyone can create a portfolio that will beat any market averages long term.
About only time I use mutual fund is when I invest overseas and cannot purchase directly, or direct purchases would be too expensive. Up until few years ago, brokerage commission was prohibitively expensive for individuals but with discount brokerages, this barrier is eliminated.
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