Have you considered investing in mutual funds but haven’t yet because you don’t quite understand what you’d be putting your money into?
If so, I wrote this for you!
Funds can be a great solution to gain diversified market exposure without you having to make specific sector decisions – such as putting all your money into any one property or stock. Specific sector decisions can be highly risk concentrated and unwise. There can be huge gains but also huge losses.
ETFs and Mutual Funds
Let’s get into two commonly used funds: exchange traded funds (ETFs) and mutual funds. ETFs are lower cost and more tax efficient. They allow you to buy everything – to be exposed to different sectors and asset classes, and to both the domestic and international market so you can really take advantage of the global economy.
A higher yield, lower tax environment
When you shift to funds, you move from a low yield high tax environment to a higher yield lower tax environment. Investing in funds, whether mutual funds or ETFs is a great way for the average investor to have a diversified exposure to the stock market.
It’s also a way to gain exposure to capital markets in a more intelligent way than following for example what you heard on the subway / a new crypto recommendation / a stock tip / or putting all your eggs in one basket for any other reason. Putting all your eggs in one basket is never a good idea.
Nonetheless, mutual funds are the subject of much confusion in the market and I understand why.
Many institutions offering mutual funds only share the top 10 holdings in a fund, not all holdings. This lack of transparency can be concerning for some investors who want to know exactly where their money is going. But this isn’t inevitable, and there are funds that do provide transparency (we can help you with this – click the schedule a call button further down this page if you’d like to have a conversation).
An opportunity to gain exposure to different areas of the market
Funds give you the opportunity to gain exposure in a lot of different areas of the market as opposed to concentrating your exposure in one idea / stock tip etc. Don’t be the person that puts all your money into a stock that your friend recommended. Sure it MIGHT pay off, but it’s also very risky.
Mutual funds and ETFs are a great place to start when it comes to investing. If you want to take advantage of the market, here are 3 easy tips to get you started:
1. Find a mutual fund.
2. Add more to the mutual fund over time to reduce risk concentration.
3. Put the same dollar amount in every month to take advantage of dollar cost averaging.
This means that when the market is low you’re buying more units and when it’s high you’re buying fewer units. So your average purchase price is lower than the average market price, which helps lock in your gain. When you systematically invest over time, you’re peppering at the right time, and underseasoning at the right time too. This is key.
Diversify yourself against company specific risk
There are two types of risk – market risk and company specific risk.
The benefit of investing in a fund is you’re exposing yourself to hundreds of companies to diversify yourself against company specific risk. Market risk isn’t something you can diversify away but dollar cost averaging helps you minimise this. You don’t want to put all your eggs in one basket with your core wealth, only use risk capital to invest in company specific risk where it makes sense.
The average investor doesn’t know enough to be able to take company specific risks (i.e. investing in a specific company vs. a range of companies through a mutual or exchange traded fund).
Don’t take uncalculated risks – it’s like jumping into a room filled with knives to try to pet a puppy. 99% of the time people lose money when they trade individual securities – specifically because of taking on company risk that they don’t understand.
If you are investing in individual companies, always read company statements, look at their stock performance and valuations relative to cash flow, and only ever invest risk capital (the money you can afford to lose).
Risk capital isn’t your downpayment for your first home or your core wealth, it’s money you’d be okay with losing.
Funds, however, are a great way to reduce your risk while retaining exposure to market gains. They are also a highly liquid form of investing which provides optionality should your plans change (if you want to buy a property, for example, or help your family).
If you’d like to talk to a member of my team about investing in funds, just schedule a call with us here.
Here’s to your wealth,
Michael W. Hanna
Registered representative of and offers securities, investment advisory and financial planning services through MML Investor Services, LLC. Members SIPC (www.SIPC.org). Azura Wealth Advisers is not a subsidiary of affiliate of MML Investor Services, LLC, or its affiliated companies. Supervisory Office: 420 Lexington Avenue, Suite 2510, New York, NY 101720. Phone – (212) 578-0300.