The vast majority of people who have lost money on investments in funds are people who, when investing money, acted spontaneously, ignoring the basic rules. Those who follow the 5 golden rules of “how to invest in funds” usually enjoy profits.
How to invest in funds – rule one: look at who you buy from
When investing savings, it is worth making sure that the investment product is properly selected for your level of risk acceptance and time horizon. It is necessary to take the time to meet with an experienced advisor who is supported by the results achieved by his clients.
A very important criterion for choosing a distributor should be its independence. This is because it depends on whether the fund sold will actually be tailored to the client’s expectations, or whether it will be the result of the sales goals of a large corporation. For them, it is not so much your profit that is important, but the opportunity to sell products that have the most beneficial effect on the financial result of the corporation.
Before you make a decision, consider whether its purpose is to protect capital and return within the limits of inflation, deposit, treasury bonds. Or maybe you are braver and – accepting a higher risk – you will decide on stock funds? You must remember that the safety of each asset class is a derivative of the macroeconomic environment and not in all conditions a debt fund will be safer than, for example, an equity fund. You also need to answer the question of whether you are able to accept the loss in certain periods of time and are ready to wait a little longer for a profit. It is necessary to remember that
Rule two: remember about the investment horizon
The longer it is, the greater the chance that even if our investment is not perfectly timed, it will make up for the losses in the following weeks or months and allow you to make a profit. This is especially true for stock markets, which are characterized by cyclicality. Also, remember that an experienced investor knows that declines create an opportunity to buy and you should not get overly emotional.
Rule three “how to invest in funds”: restrain emotions
Investing is inherently associated with emotions and our final result often depends on them. Few investors decide to invest funds and forget about them for several years. As many studies show, the most common behavior is buying when the investor sees a good performance and selling when the markets start to fall. The worst possible effect – realization of losses. Wise investing is the opposite, i.e. following the principle “Buy low, sell high”. A decline can be, and even should be, a buying opportunity. Admittedly, there are long-term trends, but it is important to remember that they do not last forever.
Principle four: diversification
In our opinion, this is the golden rule. You have to “be present” on several markets at once, not to pack money into just one fund, into one type of asset. It is rare for a sudden decline in shares to occur on several markets, i.e. for example in Poland, France, the United States and Japan. There are many solutions that give global exposure and it is worth using them when considering how to invest in funds. What’s more, taking care of such a portfolio, in which we can find several asset classes, will allow us to come out unscathed from many situations. It is safer to have not only stock funds in your portfolio, but also money and even commodity funds. Building such a portfolio is no longer unrealistic these days, even with limited funds.
Rule Five, “How to Invest in Funds”: Choosing a Fund
This is a difficult task. We do not allow ourselves to be deceived by historical results. True, this is a good omen and confirms the fund manager’s ability to generate high returns, but it must not be taken as a guarantee of future profit. At the same time, we should remember that even a very talented manager operating on the wrong market will not allow us to make money. On the other hand, a poor manager may not take full advantage of the opportunities arising from a growing market.
Before we decide on a specific choice, let’s get to know the fund’s strategy, management style and – what is extremely important – the amount of fees for its management. It is worth considering investing in foreign funds, which are often cheaper than domestic competition.
There is one more feature that distinguishes a good investment from a bad one, and it is extremely important for retail clients – liquidity. From the client’s point of view, this means the possibility of exiting the investment without delay and additional costs, and from the manager’s point of view, the possibility of monetizing the fund component. We find out how important this matter is in moments of panic and massive sales. To better illustrate this, it is enough to do a simple exercise. Let’s imagine a situation in which we desperately need money, and the only way to get it is to sell some of our property. If we decide to sell a car or an apartment, there will certainly be people willing to sell it quickly. But when we try to sell, for example, a washing machine or a TV set, the situation will be more difficult, because the number of similar sellers will be very large. Let’s go back to the capital market. Let’s review our investments and think about which assets will be more willing to buy when we need to sell them. Will more people reach out for treasury or corporate debt in moments of panic? Would you rather have stocks that are traded for several billion dollars every day or tens of thousands of dollars? When choosing a fund, it is therefore worth being aware of the market on which it invests the entrusted assets and what level of liquidity this investment is associated with.