Hop In

I think I first heard about Mutual Funds from Bo Sanchez.  He likens it to a vehicle that almost anyone, with some funds to invest, can jump into, and that it should be a staple in the portfolio of any smart investor.

I was not entirely convinced (I did not really understand).

To further dispel the mystery of this so-called staple – Mutual Funds – I did some further reading and some interviews.  It is simpler than I thought.

Mutual Funds, turns out, is an investment vehicle where people can pool their resources to take advantage of the magic of larger numbers, that is, because a lot of people invest into “the fund”, they have a large number, and thus, the mutual fund manager – a professional who will manage the investment – can get better rates of return for them.  The mutual fund manager trades the “pooled” money on a regular basis and the net proceeds or losses are then typically distributed to the investors annually.  As my friend Salve Duplito said in one of her articles in MoneySmarts, with as little as USD$100, the regular John or Juans can get their feet wet in an instantly diversified portfolio of stocks, bonds, or both.

A sort of safe haven for the cautious investor.

But do not think it is that easy.

The game of mutual funds is played long term, that is about 7 years or more, so that investors can take advantage of the so-called dollar-cost averaging, which is a strategy which guarantees that an investor will buy less shares of a mutual fund when they are expensive, and more shares when they are cheap.  And usually the strategy is investing an amount regularly (like what I do – USD$100 per month).  The funds you should invest should also be funds that you can forget about or you won’t need because you will only revisit it again after 7 years.  Mutual fund companies also send you a report every month so you can monitor your investment’s growth (hopefully, it will be growth).

I have mutual fund investments with one of the more established fund managers.  The return is about 17%.  I know that it is not much.  I have heard of returns as huge as 37% but those require about an investment of a minimum of USD$20,0000.  Here’s an excerpt from the New Year letter of my fund manager:

The performance of global markets upholds what we said before. This new bull market will be an opportunity of a lifetime. In fact, many stocks have gone up 400 percent to 500 percent during this period. One of the reasons why markets have rebounded strongly is because they came from the worst level of market confidence, not actual dismal operational performance. Because of this, the recent recovery has been strong and swift.

Now that the holidays are over, it is time to get back in the game and take a look at what lies ahead in the year 2010. The year of the Tiger.

Local stocks rebounded with the PSE Index gaining 64% to 3,099.19. And despite the combination of the various tragedies, calamities and atrocities that have taken place in the Philippines last 2009, most Filipinos approach the New Year with a sigh of relief and with a more optimistic mindset.

We believe that 2010 will definitely be an even better year for equities. Elections are near and historically right after upon a smooth transition stocks gain 30% at the very least in the following 3 to 5 months. Given the quality of the leading candidate, it can be surmised that the market can be more buoyant for the 2nd half.

Although, nobody really knows exactly as to when typhoons will return, how much rainfall it may bring and what fate lies ahead for the giants and other huge international financial institutions that are still in precarious situations. Similarly, there is also no telling when market corrections will come, how deep they will be and how long they will take.

That is why we have always advocated peso cost averaging, diversification of assets and proper allocation. Holding the right amount of equities lets you participate in their high returns in case the damage from the calamities or the correction in the market are not that bad. At the same time, having the proper emergency fund or cash and fixed income allocation will protect you in case the damage from the calamities or normal market corrections are worse than expected or the market pulls back substantially.

Another Mutual Fund company I am looking into is the Motley Fool Fund.  I have been receiving their free reports for almost a year now and have been more than happy with the depth of their research.

As proclaimed by their website:

We seek out value.

We will seek out companies that we believe are solid, whether small or large … companies we’ve identified as having top-notch managements, durable business models, and rock-solid balance sheets … companies working in important industries we understand.

And although the market offers no guarantees, it is our mission to buy these companies for you at meaningful discounts to what we consider to be their fair values.

We leave market-timing to others. We invest in companies, not stocks, and we don’t claim to have particular insight into the short-term movement of stocks or markets. In short, ours is a process of deep fundamental analysis.

That process is grounded in the belief that eventually, the market always wakes up to true value, and that our ownership stakes in the world’s best companies offer us the best opportunity to increase our wealth for years to come.

I like it.  Here is their fund description:

The Independence Fund seeks great companies at value prices.

We look for well-managed companies, both in America and abroad, that boast strong financial positions and operate in industries that our management team truly understands. Performing rigorous, fundamental analysis, we dissect each company’s strategy, competitive position, operations, and performance, and we review all pertinent public documents and official communications about the company.

Although we will invest with an intention to hold for the long term, we will also insist on keeping a solid margin of safety on all Fund holdings. As a result, we will sell any holding that we believe has appreciated beyond its intrinsic value.

Minimum investment is USD$3,000, minimum subsequent investment is USD$100 (monthly, I think).

But of course, you have to remember that any investment comes with risks.

It is truly an exciting time, a time to make money, lots.

So, where will you put your money this 2010?

Be rich,

Issa

Article by Issa. Art by D. Copyright 2009.
Website: www.YouWantToBeRich.com
Email: issa@youwanttoberich.com