Hi friends,
I was encouraged to see so many of
us are interested in the Monte Carlo simulations of the different portfolios using market indexes. I have also received requests from readers to talk about
other financial topics (Don’t worry, I am working on those at the moment. There
is just too much to write about and I want to make sure that the stuff I write
are as factually correct as possible). For those that are eager to learn about
your personal finance, I would recommend you guys to visit Seedly.sg – a
comprehensive website that breaks down personal finance topics into easily understandable chunks for you.
I have learnt my basics from there
and built up my knowledge from personal research. It is important to tell you
guys that I do not have any affiliations or receive benefits with them. I just
find that the materials are unbiased and objective. Also, I will definitely
make it clear if some of the posts that I write in the future are sponsored (I’m not sure
when will that happen though.) as I want you to make your own judgment on my
content.
For this week’s topic; I will be
talking about active investing vs passive investing. More specifically, managed-mutual funds/ unit trusts vs
index funds/ etfs. These are the definitions for the both of them from Investopedia.com:
Managed-Mutual Funds:
A mutual fund is
a type of financial vehicle made up of a pool of money collected from many
investors to invest in securities like stocks, bonds, money market instruments,
and other assets. Managed-Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt
to produce capital gains or income for the fund's investors. A mutual fund's
portfolio is structured and maintained to match the investment objectives
stated in its prospectus.
ETFs:
An
exchange-traded fund (ETF) is a type of security that involves a collection of
securities—such as stocks—that often tracks an underlying index,
although they can invest in any number of industry sectors or use various
strategies. ETFs are in many ways similar to managed-mutual funds; however,
they are listed on exchanges and ETF shares trade throughout the day just like
ordinary stock.
Here, some of you
might assume that the two funds are the same; investing in stocks, bonds etc
from the pool of money that they receive. However, the key difference is that
the objective of the mutual fund is to beat the index, while the objective of
the ETF is to track the index (The index is a way to gauge the market as a
whole. Example the STI, S&P 500, Hang Seng etc.).
In my previous
post, I have discussed the results of simulations using the etfs as a part or
our whole portfolio. Notice that I have continued to invest the same amount of
money during my simulation? This is an example of passive investment, where the
investor does not spend a lot of time or energy to monitor the market or try to
find the “best” stock to invest. We can see that majority of the time, the
investor would earn a decent return on his/her money.
Hence, some of
you might start to wonder: “If not doing anything other than buying and holding
can earn me a decent return on my money. Why don’t I learn how to invest, put
some effort into selecting the best stocks and try to beat the market?” This brings us to managed-mutual funds, where the
managed-mutual funds managers would try to beat the market by selecting stocks
using fundamental/ technical analysis. Generally, the people working for the
funds are compensated extremely well for their expertise and their effort in
trying to deliver stellar returns to the money that they receive from their
investors (Similar to hedge funds, but hedge funds are a different topics, but
they belong in the same category to active investment).
You would expect
that the managers of the funds would beat
the market right? As they have all the conditions to make them succeed.
Years of experience, qualification, time spent to analyse the stock market, the
latest technology to predict the movements of the charts etc.
Friends, no. From a research paper that I am currently reading, I have to
inform you about the advantages and disadvantages of investing your money
through managed-mutual funds. Especially from the point of view of past
statistics, on how just sticking to the market works best for you in the long run. Now that I have explained the
context of the research paper, in my next post, I will look into the data on the returns of managed-mutual funds (Actively-managed
funds) vs their respective indexes.(S&P 500, S&P smallcap 600, S&P midcap 400 etc.)
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