Welcome to the Weekly SUMmary - 06/04/2021
What are Mutual Funds?
"A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt..." (reference here and below.)
What are Exchange Traded Funds (ETFs)?
"…ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool..." (reference here and below.)
The question: What should you invest in?
ETFs will typically track their benchmark (group of investments with a goal of performing similarly to an asset class or exchange [i.e. an S&P 500 fund will attempt to perform similarly to its namesake index]) closely. There have been many articles and much research comparing performance of mutual funds related to their benchmark or related index. Articles, such as the one linked below from Forbes, will state that some asset classes of mutual funds have underperformed at a rate of almost 90% of funds investing in that area.
The S&P 500 has averaged approximately 10% (always fluctuating) over the past 10 years. Is that enough? Is the risk of potentially losing upwards of 35% over approximately 6 weeks worth the potential gain of approximately 10% per year? (risk blog: Risk Tolerance Questionnaire)
Then there are individual stocks and bonds. Explained here What is a Stock? and here What are CDs and Bonds: Are They Different? and if you select the correct company with stocks, the 10 year return could be many multiples of an exchange like the S&P.
The Problem: How do you choose?
With statistics of as many as 90% of funds underperforming their asset class/benchmark, why would anyone choose them?
Then the risk question comes in. Do you want to diversify? This could mean holding a variety of stocks or bonds, or mutual funds or ETFs that are invested in a variety of areas of the market. There’s domestic and international, large cap, mid cap, small cap, emerging markets, investment grade bonds, specialty bonds, CDs and more.
Do you have the knowledge, expertise, or time it would take to make the right decision?
The Answer: Research your options and/or utilize a professional.
To understand why one may choose to invest in a mutual fund, look at the 10 year annualized performance of a well known fund that I can't specifically name here. As of the end of April 2021, the returns were above 15% annualized. Looking back in this blog, you’ll remember that the S&P returned an average near 10% over the same timeframe.
That said, there are frequent management changes in the mutual fund world and still another large percentage that do not beat the benchmark. A rigorous screening/selection process is advised if attempting this without the help of a professional.
Also, one may want to allocate (everyone’s favorite word [sarcasm]) amongst asset classes in an attempt to even out returns. When one asset class performs well another may not, therefore as the rotation happens (i.e. 2021 is a good example of tech under performing while the energy sector over performs), if you are invested in a variety of asset classes you may even out the returns with time. Or, one may attempt to be more tactical and look for potential opportunities in the marketplace as market cycles shift with time.
As you can imagine, all of this takes time and understanding of the markets and economy. There is a reason why one of the most heralded investors of the last century has been quoted ad nauseum stating:
"A low-cost index fund is the most sensible equity investment for the great majority of investors." --Warren Buffett
Why would I share this? There are too many articles, bloggers, or other influencers out there that make it seem as though investing is easy. Investing is only a portion of setting one up financially. Habits and plans are some of the most impactful ways to influence financial stability in the long term. Whatever you do...
Do SUMthing smart with your money.
The content provided is meant to be educational in nature only and not to be construed as investment advice. Investments referenced are for example only and should be considered strongly prior to selecting for your portfolio. Investors should research or seek professional advice prior to buying and selling securities.
The S&P 500 index is unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results.
Asset Allocation and Diversification are investment strategies that can help manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets. Investing involves risk, including the potential loss of principal.
Mutual Funds and Exchange-Traded Funds are sold by prospectus. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
(06/21)