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The Case for Investment Funds

Picking individual winning stocks can be an uphill battle.  Sometimes when you think you have made all the right considerations, the price still goes the opposite way you were hoping it would.  To some extent this is part of trading, you will never be right all the time.  Even the best in the business are not perfect, so fret not!  The goal of trading and investing is to be right more often than you’re wrong.  Beating the market is not easy or everyone would do it.  The fact of the matter is, sometimes you will lose money and that’s OK, its all part of the process.  I’m going to tell you about the easiest and safest way to invest in the market: investment funds.  First, let’s start with a lesson from one of the greatest investors of all time.

The Warren Buffett bet

First off, the bet was not for any personal gain, all the proceeds went to Girls Inc., an Omaha based charity that provides after-school care as well as summer programs for girls.  The background is, Warren Buffett bet a host of hedge fund manager that he would earn more over the course of 10 years by investing in an S&P 500 index fund.  While the hedge fund managers would invest in their hedge funds.  All investors started with $320,000 and a goal of reaching $1 million at the end of 10 years.

The men made the wager in 2007.  If you remember, the economy and stock market collapsed in 2008 & 2009.  The market rose from 2010 through the current day in 2018.  Can you guess who won?  Warren Buffett’s fund averaged a 7.2% gain per year, despite the recession at the beginning.  The hedge funds managed an average of only 2.2% growth per year.  Buffett beat every single hedge fund by a significant margin.

The take-home message here is many times those who trade in the market for a living don’t manage to beat the market.  If they can’t beat it, what makes you think you can?  This is why index funds are a great option for everyone looking to get started.  If they are good enough for Warren Buffet, they are good enough for you.

Fun with Funds

Funds are single shares you can buy that have ownership in multiple companies or investments.  Think of all funds as pre-diversified investments.  Fund managers can make funds from anything they want.  The most well-known Index Funds are ones that follow the S&P 500, the Dow and the Nasdaq.  I am investing in several funds, more on that soon.

Safe Investment Funds

Mutual funds trade only once per day and have only one price per day.  Finance websites provide estimates throughout the trading day but if you decide to purchase shares of a mutual fund, the order will be processed at the end of the day once the price has been determined.  Selling shares of a mutual funds is the same, your order will be settled at the end of the day once the price has been established.  Mutual funds have minimum investment levels, too.  The only mutual fund I am currently invested in is PRGFX which has a minimum investment of $2,500.  Each subsequent investment must be at least $100.  Once nice thing is, you can buy a partial share, so you can invest any amount you want as long as it meets the minimum.  On 2/22/18 I bought 5.204 additional shares for $66.32 each, a total price of $345.13.  I had exactly $345.13 to invest, so mutual funds offer that convenience.

Mutual funds can be traded for free as long as you meet the criteria.  The criteria typically include minimum holding times ranging from 60 to 120 days.  If you cash out too soon the brokerage will charge fees.  If you are investing for the long term this will not be an issue.  In my case, I use E*Trade and have shares in PRGFX.  I pay no fees or commissions so long as I leave the money in the fund for at least 90 days.

Mutuals Funds as a Passive Investment

Mutual funds provide a safe way to invest in multiple companies without having to pay much attention to the market.  If you have limited funds and want to be a truly passive investor look no further than a good mutual fund.  You can research different mutual funds using Yahoo! Finance or Google Finance.  Be sure to consider the Morning Star rating, 5-stars being the best and 1-star being the worst.  I will not list a bunch of different finds for you to research because that is not my style.  I will only tell you about investments I am personally willing to invest my own money in.  Currently, the only mutual fund I am invested in is PRGFX.

ETF’s

Exchange Traded Funds or ETF’s trade just like stocks.  The price of ETF’s vary throughout the day and can be bought or sold at any point so long as markets are open.  These funds will trade with typical fees and commissions.  E*Trade charges $6.95 per trade, buying or selling.  Robinhood doesn’t charge any fees.  The SEC has strict approval procedures for anyone wanting to start a fund of their own. Needless to say, that’s an entirely different animal that I don’t understand and will not be covering today.  SEC regulations provide a level security for investors, while they don’t protect against market losses they do help protect against theft, fraud and bankruptcy.

ETF’s have Morning Star ratings too, the same as mutual funds.  If you are researching new ETF’s to invest in be sure to consider this rating.  While not perfect, Morning Star does provide an independent analysis and review of the fund’s past performance.  Keep in mind that past performance does not guarantee future performance, many factors can affect a fund.  Funds can maintain the same symbol but can get a new person managing them.  The new manager may take the fund in a different direction or invest in different stocks.  You should check your fund’s rating at least once a year to verify that it has not decreased.

My Safe/Risky Investment Funds

I currently hold investments in 2 ETF’s.  The first is MJ a fund traded on the New York Stock Exchange or NYSE.  It has exposure to many companies in the existing tobacco industry and the emerging marijuana industry.  So far this fund has stayed mostly flat but with all the new laws going into effect both here and with our neighbors to the north in Canada, I believe this fund will explode in the coming years.  My guess is it will perform in the same way HMMJ:TO has.  HMMJ:TO is a Canadian-based fund that has exposure to their emerging marijuana industry. Since this time last year, the price has doubled.

The other fund I am invested in is ARKWHere is a link to the full story on why I picked this fund.  This fund is unique because it holds Bitcoin and other large growth stocks.  ARKW has 7% of its assets held in Bitcoin.  ARKW allows me to be invested in the cryptocurrency market without having to set up an additional account with a cryptocurrency exchange.  The fund also eliminates the complications of dealing with the banking restrictions associated with the crypto markets.  Federal regulators require all brokerages to be insured against theft and brokerage bankruptcy. Cryptocurrency exchanges are not regulated in the same way. Cryptocurrency exchanges are therefore susceptible to theft and bankruptcy while my Bitcoin investment, held through a brokerage, is not.

ETF Advantage

If you want to invest in a certain industry but are unsure about the particular companies, pick an ETF that is aligned with that industry.  Google is your friend here.  Say you want to invest in oil or natural gas, Google “natural gas ETF” and you will have a selection to pick from.

 

Thanks for reading and happy trading!  Please follow this blog to learn the market with me!

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