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SUMMARY SHEET
INVESTING
This module focuses on our long-term account and the difference between being a
saver and an investor.
SAVERS: people who save their money in banks or credit unions
INVESTORS: people who invest their money directly into the economy via the equity
(stock) markets
The PROBLEM with saving is the low rate of return banks/credit unions give back for
the use of their money. Often the rate of return is so low (often between 2-6%) that the
savers are unable to grow their money, preventing them from reaching financial
independence. The result is that the banks/credit unions get rich off of their clients
money, and their clients, who are the savers, suffer financially.
The SOLUTION to saving is investing. Through bypassing the middle-man
(banks/credit unions) and investing directly into the economy, an individual can get
higher rates of return. A higher rate of return means that money can grow faster making
financial independence possible. The goal now is finding a place to invest that is as safe
and easy as possible.
There are many ways and places to invest money, including cash, shares and real estate,
but based on my opinion and on the opinion of many financial experts (including those
who wrote the books referenced in the introduction) MUTUAL FUNDS or
SEGREGATED FUNDS are often the best option for most people.
I personally believe that mutual funds are the best long-term investment vehicle for
people who are busy and have limited business knowledge. However, not all mutual
funds are equal and having a basic understanding of how they work and their advantages
and disadvantages can help you make better investment decisions.
MUTUAL FUNDS
Definition: a mutual fund is a collective investment that pools money from many
investors like us, and has a professional money manager who then invests that pool of
money into the stock market. As an investor, we own shares in proportion to our
investment and we receive a proportionate share of the earnings that the fund makes.
Mutual funds therefore vary with respect to the expertise of the MONEY MANAGER
and the FUND TYPE (based on your risk vs return profile). Make sure your financial
advisor explains all these concepts to you again when deciding on what mutual fund to
invest in as your long-term savings vehicle.
ADVANTAGES of Mutual Funds:
1. Ownership
2. Professional
management
3. Variety of
Objectives
4. Diversification
5. Minimum
investment and
potential for
growth
6. Dividend
payments
7. Marketability
8. Exchange
privilege
9. Regulation
10. Tax Reporting
You invest directly into the economy instead of loaning
your money to a bank. So you become an investor and this
is a good thing.
Every mutual fund is run by expert money managers who
have the right education and who can dedicate their lives to
managing and choosing the right stocks for their investors.
You can choose the fund that best suits your personality and
meet your investment objectives-this is called your Risk vs
Return profile and it’s unique to you.
Its high risk to put all your money into 1 or 2 stocks. But in
a mutual fund your risk is reduced because you are investing
in a wide variety of different securities/investments.
Most mutual funds can be started with a low minimum
payment and historically mutual funds have far
outperformed more conservative investments (like GIC’s or
savings accounts at a bank).
Earnings can be paid out to you quarterly or monthly OR the
best strategy is to just reinvest the dividend reinvestment.
This is the best strategy because it gives you the advantage
of compound income profits. Basically you make much
more money in a shorter amount of time.
Your money is always available making it easy to get your
money back. The funds are obligated by law to buy back
shares you own at their current net asset value.
The “family of funds” concept allows for exchange of
shares between mutual funds in the same family with little
or no additional sales charge.
All funds, by law, must provide the investor with an
accurate and up-to-date information booklet that describes
the fund in detail this booklet is called a Prospectus.
Mutual funds will send you annual statements showing
income and capital gains. So you are very much informed
about how your fund is doing.
DISADVANTAGES of owning a Mutual Fund:
1. Time
Horizon
2. Market Risk
Because the stock market fluctuations, mutual fund portfolio’s are
designed for long-term planning (>10 years)
Net asset value of a mutual fund will decline if the market goes
down
2 STRATEGIES to diminish the disadvantages of Time Horizon and Market Risk:
1. Investing for the long-term (ideally 10years or more), and
2. Using a technique called Dollar Cost Averaging
You want to use Dollar Cost Averaging in conjunction with long-term investing.
Experts say that market “timing” is a bad way to invest because no one knows exactly
how the market will fluctuate, but with mutual funds, you can use market fluctuations to
your advantage by investing systematically and continuously.
By investing a fixed amount each month (the Pay Yourself 10% First Principle)
regardless of market performance, this averages out the amount you pay for new funds,
so that you are never paying the highest price or the lowest price. When the market falls
and the price per share goes down your monthly investment buys more shares. Over time
when the market rises those “extra” shares bought in the down market increase the value
of your portfolio and this is a good thing.
OVERALL:
Tips for successful mutual fund investing (www.primerica.com)
1
Invest for the long term. History shows the longer your time horizon, the
greater your potential for positive results.
2
Don’t try to anticipate market “ups” and invest only during that period.
Even most experts can’t time the market!
3
Re-invest dividends. That’s added income to build toward your goal of
financial security. Resist the temptation to withdraw!
4
Match your level of risk to your age and circumstances. If you’re young,
you can afford to be more aggressive. If approaching retirement, your best
bet is a more conservative fund.
NOTE: although this module primarily focused on describing mutual funds, segregated
funds are similar in many ways and would also be a good option for a long-term
investment vehicle. Make sure to discuss this option with your financial planner when
deciding what is right for you!