Investing in funds is dumb

by Admin
Updated: June 21, 2018

Investing in funds is dumb unless you know exactly how the fund itself is invested

A fund is technically a sum of money for a purpose. An “investment fund” generally refers to aggregated funds from multiple investors controlled by a third party (fund manager, committee, computer algorithm) who, in order to spread risk, invests the fund in a range of securities subject to certain restrictions determined by the fund’s defining parameters.

It is possible/easy/normal to participate in an investment fund based on its historical performance without paying much attention to the details of its underlying securities. But the advice here is: Unless you know what you’re doing with your money, don’t do it.

I hear & read no end of advice along the lines of, “Unless you’re prepared to do a lot research, you should probably invest in a [fund]” where [fund] is some kind of mutual fund (usually an index fund) or EFT.

I say, “Unless you’re prepared to do the research, you shouldn’t be parting with your money at all.”

Basics

Where should your money be?

Is a pile of cash under the mattress in a good neighborhood really at more risk than deposits in a bank that’s overexposed? Are shares an old established company with historically good returns a better investment than those in a new one in an evolving market? If an investment is popular, does that mean it’s good?

It’s impossible to provide answers without knowing more about the underlying factors.

I have seen banks fail, old companies disappear and booming markets crash.

Considering how much risk can be attached to simply keeping hold of money, embarking on a growth-for-risk strategy without even knowing what the money is in seems crazy. Who would do such a thing? Everyone...

Excuses, excuses

There is an old saying, “Nobody ever got fired for buying IBM” which refers to the fact that, at the time, IBM so dominated its industry that no-one would fault you for buying their products or their shares, even if things went wrong.

If everyone agrees that index funds are the most sensible long term investment, it’s OK to invest in them for that reason alone and you won’t be embarrassed if things don’t go as well as you’d hoped or you missed out on upstarts like Compaq or Apple.

Investing in funds is...

  • Smart... if you want to be passive. Funds are good for passive investors because they are generally invested sensibly by experienced professionals.
  • Smart... if you agree with them. If you’ve looked at a fund in detail and it’s very similar to what you’d create independently for yourself then it’s likely to be a very good investment.
  • Dumb... if you could have known better. If you have the ability to educate yourself about investment you can and should optimize for your own situation.

The world’s top investors invest in specific securities, not funds.

When I first started, it was with an offer from my bank of $100 to try their share-building service. I bought specific stocks based on simple fundamentals that I understood and studied their ups & downs. I made an average of 100% (doubling my investment) every year for three years and learned a lot by being focused.

More info

“Why Don’t the Rich Invest in Index Funds?” at thebalance.com cites the often overlooked fact that Warren Buffett, despite strongly advocating index funds, invests directly.

Dividends are sometimes considered to be an a hidden bonus of some funds, however, distributions adversely affect net asset value (NAV) - answers at investopedia.com.

Based on the principle that on average you cannot beat the average, index funds are considered to be the best investment vehicle for most investors in the long term. Apart from being unreliable in the short term, there are other reasons to avoid index funds - article at investopedia.com.

“Can You Be Too Passive With Passive Funds?” - several ways passive investors should be more hands-on with their portfolios are presented at money.usnews.com.

Internal links

Opposite thinking Investing vs trading The special case of gold Go to Articles
Agree? Disagree? Questions? Answers?
Please post a comment...
Log in