The Shocking Truth About Managed Investment Funds

VennerRoad By VennerRoad, 2nd Mar 2018 | Follow this author | RSS Feed | Short URL http://nut.bz/bv4ygfbe/
Posted in Wikinut>Business>Investment

What is the best way to invest money? Forget about the so-called experts and manage your own portfolio.

The Shocking Truth About Managed Investment Funds

Share dealing and investment funds are a multi-trillion dollar industry worldwide. Every day the stock exchanges of the world trade staggering amounts of money, the bulk of which is handled by professional fund managers, so-called. These fund managers and dealers are extraordinarily well remunerated, and for a fee they will manage your funds for you. If you have money to save or even money to burn, should you avail yourself of their services? The short answer is no, because none of them know what they are doing.

If that sounds a cynical or even a stupid observation, listen to a real expert. In 1987, the financial journalist Tony Levene published the only investment guide you will ever need. His book The Shares Game makes a simple but irrefutable observation: for every correct decision made in the stock market, there has to be a wrong one.

At this point, we must distinguish between investors and speculators. A man who buys a shop, injects capital into a small business, develops property to rent and perhaps sell at a later date, is an investor. A woman who buys shares in an expanding company and holds onto them for five, ten, twenty years, is an investor. A fund manager who buys X shares in company A on Monday, sells them on Friday and buys them back on Thursday the following week, is speculating, or to use a less flowery word, gambling.

If you entrust your hard earned money, your inheritance or your lottery winnings to such people, you are allowing them to gamble with your money. You are gambling, but they are not, because while you may win or lose, they can only win. And where do their winnings come from? Out of your profits. Or losses!

Think about this in a bit more depth. If you invest on your own account, who are you paying? If you give your money to a managed fund to invest, look at all the expenses involved. Many of these fund managers are paid telephone number salaries and bonuses. They employ analysts, economists, sophisticated computer programs; they rent office space in the financial district, often at premium rates; they advertise. All these people and expenses must be paid before you get back a cent of your own money. True, they can trade more cheaply than you, but how much will that save you? And if you resist the temptation to trade constantly, holding onto your assets, how far ahead can they be?

Furthermore, as Tony Levene pointed out, institutional investors cannot beat the market because they make the market. As with most every population trait, the performance of fund managers falls on a bell curve. A tiny number will do very badly; a tiny number will excel; the vast majority will win a little or lose a little. In practice, the only way everyone can profit is if the market rises. Apply this to society as a whole, we are all of us richer than our ancestors of three centuries ago. True, there were spectacularly wealthy people even then, and there are still paupers today, but there is a great deal more wealth in the world. That increase did not come about by people playing the stock market, it came about by technology and investment in capital goods - newer and better machines. If you are going to invest in the stock market, you need to invest, not speculate.

In 2009, Levene’s book was vindicated in spectacular fashion by an experiment in South Korea. A company held a competition lasting several weeks, the winner would be the person to make the most money playing the stock market. There were ten human competitors and Ddalgi, a five year old parrot! (The name means Strawberry). Guess who came third? The parrot picked out funds with its beak, and appears to have done so well because it traded relatively infrequently. Every trade costs money, and the percentages mount up.

This is also the reason women tend to be better investors than men. A recent lengthy article by the share dealing arm of a major bank pointed out that women are less confident than men, so therefore trade less frequently:

“Every time you buy and sell a fund or stock, you are also likely to incur a trading cost. Trading too frequently means these fees, which may seem small at the time, can end up eating into your long-term returns. These factors show how being too active when it comes to managing your portfolio can go against you, which is perhaps why women who trade less frequently have been shown to often achieve better returns than men.”

So what is the optimum strategy for investing rather than speculating? This is a complex question, the answer to which varies from investor to investor, although generally the richer you are, the more options you have. Everybody should have some cash in hand - under the mattress, and in the bank. Apart from that, the first rule is never put all your eggs in one basket. Investment is one field in which diversity really is a good idea. As well as emergency money, you should have some money in a reserve account where it is earning a higher rate of interest. Be sure too to take advantage of special tax-exempt schemes.

After that you should be looking to invest in the stock market on your own account, blue chip companies in particular. These are firms that have been around for a long time, in some cases centuries, which means they are probably doing something right, but even an old, established company can go bust under bad management, or if it doesn’t keep up with the times. How many companies are making typewriters today?

You should put a fair chunk of your savings into ten, fifteen, perhaps twenty shares, and resist the temptation to buy and sell. Of course, if a particular share triples in value overnight, you might want to sell all or part of your holding, but resist the temptation to play the stock market, however great that temptation may be. And don’t forget gold!

Gold is far from the only precious metal in which you can invest, but there can be problems with such investments. One is if you do not take actual physical possession of the gold, you have no guarantee it is really there. For years, conspiratards have speculated that there is no actual gold in Fort Knox, and they may be right! If you do take possession of it, where do you keep it? Obviously not under the mattress.

After that you should be looking to diversifying further, including overseas. If you have money to burn, you can consider investing in higher risk markets such as start ups, venture capital, and the new peer-to-peer lending, or even inject capital into a local business (become a sleeping partner). Property is usually a good investment, especially if you already own your own home. Usually it is advantageous to take out a mortgage rather than to pay cash, but many people find it very satisfying to own their homes outright. Buying to let, investing in land and other tangible assets are also good ideas.

A word about bitcoin and other crypto-currencies. The time to get in on bitcoin as an investment is long gone. If you have a sum of money to invest that you can afford to lose, go ahead, but realise these are high risk. True, governments don’t like them, but that doesn’t mean you should!

Whatever you choose, be confident, and do your own research. Remember, managed funds are in business to make money for both their clients and their controllers. That means if you go with them, you will always receive a smaller share of the pie.

Tags

Ddalgi, Gold, Managed Funds, Managed Investment Funds, Property, Real Estate, Shares, Stock Market, Tony Levene

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author avatar VennerRoad
Independent researcher based in South East London.

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