Mutual Funds – Page 5 – Adviceon Library

What are the most common mistakes of fund investing

Here are several common mistakes that investors can make:

No clear investment goals. Determine what you want from your mutual fund portfolio. This will help you choose the right investments to realistically meet your future expectations.

Trying to time the market. Don’t get caught timing the market – when influenced by either of the two emotions – greed or fear. Greed compels people to buy when the stock market (and a fund’s unit value) is high. Conversely fear causes many to sell when the stock market’s value (and a fund’s unit value) is low. Make regular investments to benefit from dollar cost averaging (DCA) to level out the peaks and valleys of the market. It is time in the market, not timing, that counts.

Not selecting investments with a long-term track record. Don’t just look at a mutual fund’s most recent performance. For a long-term investment, it is important to check out performance over one, three, five and ten year periods.

Shopping for a specific mutual fund, not a family of funds. The fund you select today may not be the best one for tomorrow. By choosing a reputable family of funds, you ensure that you can switch in the future with minimal cost. A family of funds also allows you to move into a money market fund if the market is reacting in a state of fearful unrest such as prior to the debt crisis and the current continuation of the debt crisis in the Euro nations. Note: Fear is measured by a special volatility index called the VIX, which when above 40 can precipitate market sell-offs which can also affect a fund’s performance. It takes great skill to navigate the market (and fund investing) at these times.

Investing too conservatively. Even if you are in your 50s, you still have about 30 years of investing time ahead. Look at investing some of your money for growth by using equity funds while keeping some in bond funds and dividend funds, and/or balanced funds.

Not seeking financial advice. Making investment decisions can be confusing and intimidating. Unless you have exceptional knowledge of the market, your portfolio could be healthier with the help of a qualified financial advisor.

8 Amazing Advantages of Mutual Funds

Mutual funds offer investors a superior means of accumulating wealth through a broad range of investment solutions based on professional investment principles in a regulated environment.

There are eight benefits of Mutual Funds which the investor appreciates:

Professional portfolio management
Manage risk through diversification
Opportunities for foreign and domestic investment
Oversight by professional managers
Low entry investment amount
Solutions meet a wide range of needs
Easy to buy and sell
Convenient administration

The rapid growth in investor confidence in using mutual funds escalated to over half a trillion dollars. This indicates the validity of using mutual funds in an investment portfolio.

Source IFIC

How do individuals or families accumulate wealth?

They save by moving money received as income into a separate account before they spend it. It doesn’t matter if you have received an inheritance or won a lottery – the rule is the same. Save, and then invest before you spend.

Here are some excellent reasons for investing.

It gives us a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.
We are eventually rewarded by seeing money make more as it works for us, gaining and compounding.
Saving paves the way for the actualisation of our goals and objectives in life, such as acquiring a home, making significant purchases, travelling, putting children through college or university, or going back to school ourselves.
Accumulated assets will increase our net worth and bring us financial independence. Such control and flexibility are within our reach if we start now.

Stumbling blocks to saving. Don’t defer to only saving what’s left at the end of the month or waiting until “things get better”. Usually, nothing is left at the end of the month, and things rarely improve because the philosophy has stayed the same – spending above income continues, and debts increase. Except for a home mortgage or loans for motor vehicle transportation, and in some cases for investing, debt is a deterrent to financial independence. Commit to a strategy to pay down all household debt and save at least 10-20% of your monthly income.

Inflation is a constant battle. Over the years, inflation has reduced our buying power. When increasing to reduce inflation, interest rates also increase our debt repayment load as a percentage of income.

Planning for your dependants. Ensure you have sufficient life insurance to pay off your debts, such as credit card balances, car loans, IOUs, and any business-related debt. Incorporate this with enough coverage to provide future income for your dependents. This is especially necessary if your debt exceeds your annual income, as it does for the average household where debt runs at 150% or more of income.

How can I assess the expense of leasing or buying a car?

The rising cost of driving.

The rising cost of fuel is making many consumers change their thinking with regard to driving expenditures. On May 5, 2011,the following was reported:

“General Motors Co. (GM-N) reported its highest quarterly profit in more than a decade, helped by fuel-efficient cars and smaller SUVs that were in demand as gas prices marched higher. The biggest U.S. automaker said Thursday that it earned $3.2-billion, or $1.77 per share, in the first quarter. It was a great start in a challenging climate that would have sunk the company just a few years ago when it was too reliant on gas-guzzling pickups and SUVs for profit.”

On average you will need to work 30 weeks to pay for your vehicle (not counting fuel or repairs). Because driving a car is one of the largest expenses in an individual’s budget, plan this expenditure carefully. From the graph you can see that expense accumulate given a payment of an average vehicle payment of $500 per month plus gas.

Kilometres are presented as the average busy driving use per vehicle as promoted by vehicle manufacturers of 24,000 km per annum. Both monies spent on a car payment and for fuel are added in the final column. Adviceon does not claim accuracy for the numbers represented as extrapolations in the table, and uses them only for illustration. Errors and Omissions are excluded.

Reduce your debts and increase your financial security

In 2008, escalating mortgage debt caused a financial crash that decimated the retirement income of many. Debt control is becoming a critical issue.

Credit interest eats away at wealth. Every household has a budget and must live within its means and save for the future. We each must be careful not to allow debt interest repayment to reduce our ability to live comfortably or retire with financial security.

Interest on the debt except for investment or business debt is paid with after-tax income. It reduces our capacity to pay down the principle on our mortgages or increase our investments for retirement.

Shift your financial paradigm away from debt The fact that so many people act without discretion while increasing debt shows that consumers need a more mature view of finance. We need to examine our genuine need for each purchase and consider the effect on our family’s income-creating ability before giving in to the temptation to buy more of what we cannot afford.

To avoid debt, we need to govern our response to each desire to have what we cannot afford. How do we do this? Work at not buying what you cannot afford, meaning living by a responsible paradigm of fiscal temperance. Learning to say to yourself, “No. I will survive without this item and will be better off debt-free!”

“If worst comes to worst, meet poverty halfway by retrenching expenses. That is what I am striving to do and reform before poverty forces me to do so. Furthermore, I have established enough levels in my soul where I can get along with less than I have; get along contentedly, I mean, Not by the calculation of our income, but by your manner of living and your culture, is your wealth really to be reckoned”. Montaigne

Reduce debt for societal justice Good financial discernment directs our actions when considering taking on debt. If a man, for example, has borrowed fifty dollars from a friend to go to a concert with his girlfriend, the goal of fiscal justice is to pay his friend back what is due to him. In conformity with the right reason, Justice demands that the fifty dollars be paid back. But how and when shall it be paid back? An imprudent man might never pay it back, so he would fail to observe the rule of social justice in finance.

Develop a strategy to pay back debt To pay back debt requires the resolution to set aside a small sum from our income each week or month until we have allocated repayment of our obligations. Look at all of your debts and begin to pay down the higher interest-bearing debts first. Another approach would be to pay off the smaller loans and credit cards first to achieve victories sooner while creating the habit of debt reduction.

What is your financial viewpoint? We must be determined to be directed by wise discretion regarding how we use credit to attain financial goals. This is for the good of all – family and society. Your financial advisor can guide you to reduce debt and increase your investment portfolio.

How do I diversify my portfolio?

By diversifying among carefully selected, different asset classes, you reduce the risk of being over-exposed to any particular asset class.

For example, an investor may hold assets such as bonds, GICs, balanced funds, equity funds, foreign equities, etc. The adage of “not putting all your eggs in one basket” applies to a diversified portfolio of assets. Having 10 different equity funds in a portfolio does not mean that an investor’s portfolio is diversified.

What is the difference between volatility and risk?

Volatility and risk are different concepts, but both have a role in determining your investment success.

Volatility is simply how much the market will increase or decrease, whereas risk is the amount of loss or gain you are willing to accept. How volatile your investments behave is often derived by the level of risk you are willing to accept. During periods of market volatility, it is important to stay focused on your asset allocation goals according to your predetermined risk profile.

Volatility is simply short-term instability that can affect all stocks, including good stocks or good equity funds, because of fear generated in the markets. The Euro-debt fears in 2012 are a good example of this. When markets are down, even a company that provides a useful, durable product may be affected. When the market calms, however, the company’s stock price may rise again.

Plan to anticipate changing circumstances

Financial planning must anticipate change. Your plan will reflect your specific financial goals and objectives, with a consideration of your level of investment risk tolerance.

Your plan can be flexible enough to anticipate life’s many changes. Financial circumstances and responsibilities often change over time such as a career or income change; the birth and education of your children or grandchildren; major purchases such as a home; retirement; and other life events, such as a disability or need for long-term care.

How can I avoid making financial mistakes?

Every good decision requires a thorough understanding of time-tested financial guidelines. Today we are witnessing an age of entitlement, in which many people are incurring debt as they put their wants ahead of their needs.

Here are a few principles that you’ll need to consider when making every financial decision:

Avoid speculation.
Aim to increase your net financial worth by increasing your income and/or education to advance your position, rather than engaging in speculative schemes. An enticing program or a “guaranteed” money-making scheme may be unethical, illegal or simply unrealistic, not to mention risky.

Every monetary strategy must be assessed in the light of your individual goals while asking these questions: “Is this venture necessary?” “Could this venture fail or cost me money, negating the so-called benefits?”

Keep your finances current.
Manage your finances day to day, according to your monthly budget and financial goals. It’s best not to borrow money beyond your abilities to repay. When investing or consuming, consider every financial obligation in light of known current income or available savings, not as-yet-unknown future change of income or opportunity, or potential income.

Maintain a frugal reputation.
Consider all decisions, especially financial decisions, on the basis of their effect on your reputation, staying true to financial commitments and maintaining an impeccable credit score.

Give. Do not loan.
Avoid lending to those in need if giving is possible. If someone approaches you requesting financial help in order to acquire “wants” or “desires,” seriously question the potential for impulsive spending. However, if that person is in need and your family’s financial well-being will not be jeopardized, consider your ethical responsibility to supply that need on an interim basis. For example you may provide $100 to a family in need for groceries for a month or two until they get back on their feet.

Never co-sign, even for your best friend.
To co-sign is to pledge your family’s personal assets against the debt of another. This means that your energies in life’s ventures (for which you have been paid over time) are being pledged against another’s liabilities and could mean the potential exhaustion of these life energies by a person whose actions you have no control over. You may also place yourself and/or your family in a situation where you legally assume the debts, as well as the legal issues associated with documents co-signed. This could in turn involve liability of collateralized assets like your car(s), or house and your income, or even culpability when there is harm to a third party. Though you may know an individual, often you do not know anyone in the related financial institution, which will hold you responsible for the debt once you sign an agreement. What if they demand payment or sue you for obligations?

Moreover, there is also a tremendous potential to harm your relationship with the individual for whom you co-sign. By signing, you may enable a person to engage in a risky venture, instead of holding off or reconsidering all alternate options.

Avoid indulgence.
Discern the difference between “needs” versus “wants” in every financial transaction — including purchases of material goods and investments. Distinguish between luxuries and necessities and ask: “Do I need to find fulfillment through this expenditure now?”

Prepare for decreases.
Prepare yourself for unexpected decreases in funds as a vital part of keeping financially current. Ask: “What would happen if there were even a small decrease of income or available funds?” “If there was a sudden drop in my income, would I need to drastically reduce my current living standards?” Avoid operating at the upper limit of income or cash on hand.

Let peace rule.
If a financial decision process makes you feel uncomfortable, the inner turmoil (known as lack of peace) may be your conscience guiding you according to your innate higher values. Consider the pros and cons in the light of all your opportunities, including saving money for a particular goal. If you do not have peace, wait, sleep on it and then see how you feel, or do not get involved in the objective or expense. Moreover, if a quick decision is required (such from sales pressure), do not get involved. Take the time to think about each decision, carefully weighing the potential consequences of either gain or loss.

What are the main benefits of investing in mutual funds?

What are the main benefits of investing in mutual funds?

The average investor, who buys stocks and bonds, does not have the necessary time to assess securities, nor the expertise to make qualified investment decisions. Mutual funds allow the investor to effectively hire a fund manager to make these decisions. Managers possess training in market analysis and have an understanding of economics. They work to assess the value of a company’s stock and develop an investment strategy that establishes buy and sell criteria, based on an educated, tactical discipline.

Some of the main benefits include:

Instant Diversification. Many have heard the phrase, “don’t put all of your eggs in one basket.” In a mutual fund, investor monies are spread across a variety of different securities investments. By investing in mutual funds, as opposed to individual securities, the account growth or loss is based upon a group of different investments, rather than the performance of a single security.

Professional management. By investing in mutual funds, the investor is not involved in the evaluation and maintenance of the underlying portfolio investments. Instead, the day-to-day decisions of each fund are handled by experienced, professional money managers.

Lower fees and expenses. Mutual funds provide economies of scale. Because mutual funds pool the resources of many investors, the fees per share passed on to each individual investor from purchasing the underlying securities in a mutual fund are often less than if they would purchase the same individual securities on their own.

Convenience. Dividends and capital gains can be used to purchase additional shares, facilitating growth to an investor’s portfolio.

Automatic Investment Planning. Commonly, investors are able to set up a dollar cost averaging plan with their bank or brokerage account to invest a set amount each month into the mutual fund of their choice.

Thousands of mutual funds to choose from. Every type of investment fund—including equity funds, bond funds, diversified funds, balanced funds, and international funds—give you access to investments in the world’s strongest companies.

You can also invest among foreign securities. Although Canada has a strong economy and is a G5 nation, it represents approximately 3% of the capitalization trading in non-domestic markets. The U.S. offers access to the highest capitalization in the world, while tremendous investment opportunity lies outside of North America—accessible via mutual funds.

Financial Consultation. Your financial advisor can help you design your mutual fund portfolio and review it with you on a regular basis. Most advisors offer the majority of the better-performing funds—with both foreign and Canadian securities included, including a wide range of international and global funds.