BY FAZAAD BACCHUS
So, we have to come to the final part in our series of mutual funds investments and I hope that you have gained some valuable insight into the wonderful and yet somewhat stressful world that is mutual funds investing.
Mutual funds are not quick or should not be a quick get rich scheme, usually those schemes are more likely to fail that to prosper. When you invest in a mutual funds you should be prepared to make money the boring way. Actually, most professional money managers would ask you not to get too excited about making money; they prefer slow and steady growth. However, you may find that some advisors or sales representatives would simply emphasize the opportunity for gain or growth.
So let me ask you this question, if a reputable institution is willing to give you a rate of 1.5% return on your money and another (not so reputable institution is willing to offer you 10% annually, doesn’t it make you wonder if you are taking more risk than you should. And even if the 10% is guaranteed, isn’t your principal at tremendous risk?
I was at a seminar sometime ago and was appalled at what I heard being presented by an advisor. His pitch was that you should refinance your home at 2.7 % and then invest the money into his plan at 8% guaranteed. Well mathematically there is nothing wrong with his formula you will actually be making a net of 5.3% less taxes of course, but at what risk? To make matters worse, this kind of an idea was presented to seniors who if they lose their principal investment, have no way of recovering.
Remember that in mutual funds and any investment, risk equals return. The more return you expect, the more risk you have to assume. You may remember some years ago a company in Trinidad and Tobago was the talk of the town, you could have gotten as much as 15% annually on your investments and no other company or bank could have competed. Today that company owes millions of dollars to their depositors and many of the funds belong to retirees. Some of those people will pass away without seeing a red cent.
So, don’t be too quick to jump on the sales pitch of fantastic returns. Ask yourself about your risk tolerance and what keeps you awake at night. Mutual funds are a safe bet, yes you can lose money and especially so in the short run. But if you hold it for a longer period and you have a good advisor you can make a reasonably good rate of return. My clients have funds where some have paid an average of 8% over the last eight years with low to medium risk.
You cannot bury your head in the sand, time have changed, a CD is no longer sufficient; its growth rate is lower that inflation giving you a negative return. It’s pointless having large sums in your current account unless it’s your turnover in business. If you cannot buy a company, buy into a company or better yet, buy into many companies. And that is the story of mutual funds, a great investment tool in Canada where trillions of dollars are at work making money for their owners. This can be your experience too, find a good advisor and work along with him.