Investing: Where to invest?

What is your goal and how much risk are you willing to take?

For investors, the higher the risk, the higher the potential reward.

Gold: Over long periods of time, gold does not beat inflation. There is also a possibility that more gold is discovered, thereby increasing supply and reducing demand. Another disadvantage with Gold is that you must sell it to realise any return. It does not pay dividends.

Debt: If a company goes bankrupt, debtholders are paid before stockholders. Therefore debt is lower risk compared to equity, and should provide lower returns.

Mutual Funds: Normally, mutual funds are considered the simplest way to invest in stocks. There are a few problems with mutual funds:

  • loads and expenses: Many mutual funds charge significant percentage of assets for their annual expenses (over 1%), sales and marketing commissions (2-5%). These fees eat into your returns
  • ability of fund managers: Very few fund managers have long term track records of outperforming the market averages
  • focus on the short term: Funds are benchmarked compared to other indexes and other funds every year. This means investors might flee a good fund that has bought companies that should do well over the long term, but have been beaten up for the short term. Investor redemptions force these funds to sell their current holdings, even if they believe in their long term potential.

Broad based Market Indexes: As they say, if you can't beat 'em, join 'em. Given how few mutual funds can actually beat the stock market average, why not pick an index fund that replicates a broad based stock market index. This way, you can capture market returns without the pitfalls of actively managed funds

No comments: