The interest rates that you get from your savings, checking or time deposits are guaranteed by the bank. The bank essentially borrows money from the depositor, at a fixed rate. Usually, the returns are not very high because of the guaranteed nature of the account.
On the other hand, mutual funds generally offer a greater possibility of higher returns over the long term. However, the proceeds are not guaranteed and hence, you can also lose money if you don’t know what you’re doing. There are different funds with various allocations. Some are heavily invested in stocks while others offer a balanced mix, while others are invested in bonds. You should take it upon yourself to understand the difference between all these choices. For your own financial health, read up and learn.
When choosing a mutual fund to invest in, take the time to do research on management and other issues. It is your personal responsibility to understand the character and professional qualifications of the team handling your money.
The general rule is to buy low and sell high. This usually happens over a prolonged period and that is the reason why most mutual fund companies require a minimum holding period.
What happens in many cases is that a newbie investor hears about the amazing returns on mutual funds during a bullish period and gets enticed to put his own money. Soon after, a tragic news event triggers a massive sell-off that leaves the clueless investor soaking in his self-inflicted financial bloodbath. Since many people usually hope to get rich quick, they end up selling at a loss and regretting ever entering the money market. This experience especially holds true with funds that are heavily exposed to equities.
The best way to realize substantial gains in mutual funds would be to think long-term, anywhere from five to ten years time frame. This simply means that before entering the market, you should already take into consideration that there might be a long wait, especially when you invest in the fund during a bear period. Downturns usually offer many buying opportunities for those investors who can see beyond the immediate future.
That being said, carefully evaluate how much of your money you can afford to keep invested for at least five years. It is hard to predict the actual market cycles and that is why a wide investment leeway is ideal. Don’t include the cash that you will use to pay for your child’s tuition next semester, for example. As a general rule, it would not be prudent to aggressively throw in all your money.
In the game of investing, it is important to have what is known as free cash flow. This is the amount of money that you have on hand that is available to address your current needs. This will help avoid the unintentional fund withdrawals that are brought about by your liquidity requirements. Make sure to have enough cash that can pay for your needs in the near term. Whatever you have in excess of that, can be invested for the long term, keeping in mind your retirement years.
While you still have the benefit of a steady income, always remember that it is important to prepare for the time when you may be out of the workforce for one reason or another. Thus, apportioning a percentage of your monthly income specifically for long-term investments in mutual funds, the stock market or a new business venture could spell the difference between a comfortable retirement and an insecure one.
This article was first published in the Working People section of the Philippine Daily Inquirer.
This article was first published in the Working People section of the Philippine Daily Inquirer.
