This article is about regular mutual fund investing (or fund savings), which is a wise and relatively safe way of investing in shares, does not require monitoring of stock exchanges and listed companies, and also generates good returns over the long term.
Investing in shares
Equities have performed well over the long term. Sometimes prices may fall for up to 2-3 years, but in the end they have always risen slowly. In general, global stock market crashes are followed by rapid price falls, while rises are quite slow and cautious from the bottom.
Regular mutual fund investing mainly in equities offers a fairly safe and efficient way to earn a good return on your investment over the long term (say 10 years or more). Historically, starting regular fund investing at even the worst possible time would have yielded a profit in as little as 10 years.
The idea of regular fund investing
Regular fund investing means investing a certain amount of money in a fund at regular intervals so that when the fund price is low, more shares are invested and vice versa. Thus, even if the price of the fund years later at the time of sale is even lower than at the beginning of the investment, the return may have been high. Of course, it is always more profitable to buy a large amount at a low and sell at the peak, but it is unlikely that this will often be the case in the long term, as it is a gamble to anticipate peaks and troughs.
Choosing an index fund
It is impossible to say which fund will perform best over, say, the next 10 years, so you should at least choose one (or even several) that has little or no expenses. These funds are called index funds, which track a specific stock market index. The low or no expenses are due to the fact that the portfolio manager of the index fund apparently does not do much buying or selling in terms of the holdings (shares in companies) of the fund. Such funds usually always invest in the largest and most stable companies. The S&P 500 index fund tracks the US S&P 500 stock market index.
In general, you should choose a fund that invests mainly in North America and Europe, and perhaps also in Asia, with a wide range of sectors represented.
The calculation and graph below explains the idea of regular fund investing in low-cost (or no-cost) index funds.
If an investor had invested a certain amount of money at the beginning in a fund whose price had gone like this, he would have lost 20% of the money he had invested. If, on the other hand, he had invested the same amount of money at regular intervals in the same fund, he would have already made a profit of more than 10%. In other words, by buying the same amount when prices are low, you get more shares and vice versa.
Of course, if you owned an omniscient crystal ball and knew that the stock market would go up every year for the next 5-10 years in a row, then of course you would immediately put all your extra money into the stock market.
The low risk of investing for the long term
The main advantage of regular fund investing over a lump sum investment is the reduction of risk over time. The fact is that no one knows whether stock market prices in general will rise or fall over the next year. An analyst or a bank investment adviser may make analyses and recommendations for different funds, but these are only guesses or hunches about future price movements. Usually, a bank investment adviser will advise you to buy a fund that is going up.
The value of a fund may have risen 30% in the last six months, but in the next six months it may fall by the same amount. The decline can go on for a long time and it can take years before the investor even comes to his senses. A regular fund investor, on the other hand, has bought a fund for a small amount first, bought more for the same amount after a certain period of time, and so on. There is no need for much of a rise in basis when investing in this way has already yielded a profit.
Investment diversification over time
Spreading the total amount invested over a long period of time is also a big advantage. If a family has an extra $10,000 a year that should not be wasted on anything (travel, children’s expenses, etc.), it is wise to invest this amount in, for example, an equity fund of €833/month and do the same in future years.
In 10 years, the $100,000 has been invested, but the profit is likely to be the same, calculated at a moderate 8-9 % annual return.
So this $100000 investment has yielded the same amount of money (on which, however, taxes have to be paid). It must be remembered that this sum of 100 thousand dollars would not have been possible to invest (without taking on debt) in the first year of the investment.
Diversification of investments by sector, etc.
The rules for regular fund investment do not apply in the same way to individual shares, as the risk in individual shares is much higher. A company’s share price can fall by 50% to 100% and the company can even go bankrupt. In a diversified fund across industries, countries, continents and high net worth companies, there is no such high risk.
In addition, in direct equity investments, stock performance and the market should be actively monitored. This can be time consuming and often involves monitoring the performance of the companies in your portfolio on a daily basis. For many people, losing trades and a fall in the price of their own shares are a source of great regret.
You have to be patient
Investment guides advise you to buy when the price is rising and sell as soon as it starts to fall. This is often accompanied by the complex issue of technical analysis. Easier said than done. It would be easier to make money if you could always buy at the bottom and sell at the top. In the long run, dilly-dallying knows nothing but high buying and selling costs. Sometimes you make a profit, but soon you make the same amount of loss.
It is true that the biggest gains are made by taking small profits and doing this often enough. Or, alternatively, by picking a stock whose price rises by hundreds or thousands of percent. These things just don’t work for very many people and require close monitoring of stock movements and expertise, as well as good luck. Regular mutual fund investing, on the other hand, requires little or no knowledge of the market or close observation of the market.
The requirements of regular fund investing:
a long investment horizon, at least 10 years (if you have started regular equity investing at a peak, it is very unlikely that prices will fall for 5 years before they start to rise more steadily)
buying shares at regular intervals for a small amount at a time
The benefits of regular fund investment:
lower risk than a one-off investment, price fluctuations allow you to buy more at a lower price
Spreading of the final total investment, even a large one, over a long period of time
the return on investment is not directly affected by falling, falling or rising share prices of the equity fund
investing small amounts at a time: many people do not have the money to invest a large amount at once
over a long enough time horizon, an almost certain way to get a good return on your investment
Choosing the right equity fund
It is impossible to say which funds will be at the top of the yield curve in the next ten years. Instead, we can calculate which funds are affordable in terms of costs. It is not quite the same whether the management costs of a fund are 3% or 0% per year or the redemption fee is 3% or 0%. For example, a management fee of 3% per annum can take up to 20-30% of the final return over a 10-year period, while a management fee of 0.5% takes only a few percent of the same return, depending on the performance of the fund.
Choosing the right fund is not an easy task. As a general rule, however, it is worth investing in a fund(s) that have historically performed at least reasonably well and where the annual management fee is not very high (e.g. 0%-0.6%). Such index funds can be found, for example, in Nordnet’s index funds.
Starting regular fund investment
The timing of when to start buying is not terribly important, as buying is regular over the long term and it is difficult to time it optimally to coincide with the troughs of price fluctuations. However, it is worth postponing the first purchases by a couple of years if there is widespread talk of stock overvaluation or even a stock market bubble, and if prices have risen a lot in a short period of time. Historically, major price falls and “stock market crashes” have lasted from a few months to two or three years.
The longer the period of falling prices, the more fund shares you get for the same money, and the smaller the price rise needed to turn investments into profits. You can buy more frequently at your discretion if you believe the price floor is close.
Timing of sales of fund units
As soon as you know that you need or want to use the money invested for some other purpose in the next few years, you should start looking at the right time to sell. It is important to time the sale of fund units carefully, and sales can be made in several tranches. It is important to time the sale of fund shares to the highest possible price, so that at least not too many previous purchases have been made at a higher price than the future sale price.
Naturally, the more you calculate from the peak price, the less profit you will make, since you have also bought shares at the peak price and the total amount invested has grown over the years. A drop of just a few percent from the peak can mean a profit of up to 10-30% less, depending on the price movements. As a rule of thumb, if after years of saving the fund price falls more than 20% from its peak, it is worth (if possible) continuing to buy, waiting until the price has recovered from the trough and selling when the rise has lasted at least a few months or the fund price has even reached a new peak.