Monday, February 22, 2010

Investing In What You Do Not Know

Personally, I do not think that you should be investing in Mutual Funds or ETFs without an understanding of how stocks and bonds work. I would think that the best why of gaining knowledge is to invest in some stocks or bonds, even if on a very small scale. Some people can read to understand these investment vehicles of finance, but hands-on practice is still probably a necessity. There is nothing like practical experience to learn something.

It is not so much that you should not invest in what you cannot afford to lose, but what you cannot afford to lose in the short term. There is going to be fluctuations in the short term. You should plan on a 3 – 5 year period to exit a Mutual Fund or ETF portfolio. So, if you are retiring in 3 – 5 years, you should be putting into cash the money you will need at retirement. I live off my dividends, so I have cash and future dividends to last roughly 5 years. The interest on cash and MMF funds could make you cry. However, this is better than having to sell assets at a loss because you need the money to live on.

I have talked to a lot of people who have invested in Mutual Funds and ETFs because they do not understand the underlying assets. They seem to think that all gains made is due to them, but all loses are a catastrophe and are someone else’s fault. They wonder where their money has gone, but they never asked where it came from when the value of their assets went up. Markets normally fluctuate. The capitalistic market place is boom and bust. It has always been. It may have been caused by stupidity in Wall Street this time, but if it were not, the bust would have been caused by something else. This is also looking at investing in the wrong light. What you need to look at is the long term, and in the long term, equity investment is good.

And, there is nothing wrong with investing in Mutual Funds. (I would not do this personally, but that is another story.) The point is if you are not willing to do the work to properly invest the money yourself, the next best thing is to pay someone else to do your investing. What I disagree with, is for a person to allow someone else to invest for them into something they do not understanding. If they had at least some understanding, the current recession would not have been a surprise. Recessions are common. We have them all the time. With any sort of historical perspective, investors would know that.

My guess is that most people, who are complaining about losing money in this latest recession, invested in things they knew nothing about. If you cannot afford the risk of the whole market, you should be in stock that used to be called “widows and orphan” stock. I do not believe they still exist, but you can buy conservative, dividend paying stock. They would be low risk stock from well know firms that pay good dividends. These are unexciting stock and they are generally ignored, especially in bull markets. Most mutual fund companies call funds containing these stocks “Income Funds”. I do not know why, but they do.

So, please, if you are investing in Mutual Funds and ETFs, get some education about what it is you are investing in. Do no invest with no knowledge and then whine about your investment when things go wrong. It is annoying. But I guess the real problem is, I have heard this all before. Every recession it is the same whine about investments going sour.

It seems to be every decade we have a recession and every time people who have invested in what they do not understand whine about how it is not their fault they lost money, it is someone else’s fault. If investors learn nothing in this recession and do not take responsibility for their investments, I will hear the same whine in the next recession also. It is annoying.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets. Also, look at other investing notes on my website at Follow me on twitter.

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