Investing in the stock market can be both exciting and daunting. For many, the prospect of navigating complex financial landscapes is intimidating. However, managed funds present a viable and probably the best option for those looking to access the stock market with expert guidance and reduced risk. John Lowe of MoneyDoctors.ie delves into what managed funds are, their benefits, and why they may be the best way for everyday investors to participate in the stock market.
What are managed funds?
Managed funds, also known as mutual funds or investment funds, pool money from multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, and other securities. These funds are managed by professional fund managers who make investment decisions on behalf of the investors. By pooling resources, managed funds allow individual investors to access a broader range of investment opportunities that they might not be able to afford or manage independently.
The benefits of managed funds
- Professional management: One of the most significant advantages of managed funds is the expertise they offer. Fund managers typically have extensive knowledge and experience in the financial markets, enabling them to make informed investment decisions. They conduct thorough research and analysis to select securities that align with the fund’s objectives.
- Diversification: Managed funds provide instant diversification by spreading investments across various assets. This helps reduce risk, as the performance of one security will have less impact on the overall portfolio. In contrast, individual investors who buy stocks directly may find it challenging to achieve the same level of diversification without a substantial capital outlay.
- Accessibility: Managed funds are designed to be accessible to a wide range of investors. Many funds have low minimum investment requirements, making it easier for individuals to start investing. This accessibility democratises investment opportunities, allowing more people to participate in the stock market.
- Liquidity: Most managed funds allow investors to buy and sell units easily, providing liquidity. Investors can redeem their shares on a regular basis, making it easier to access cash when needed. This is particularly advantageous compared to certain direct stock investments, which may require more time to sell or may be less liquid.
- Variety of options: There are many types of managed funds available, including equity funds, bond funds, index funds, and balanced funds. This variety allows investors to choose a fund that aligns with their investment goals, risk tolerance, and time horizon.
- Cost efficiency: While managed funds charge fees, they can still be cost-effective compared to the potential costs of managing a personal portfolio. Investors save time and resources by relying on professionals for fund management, research, and trading.
Simplicity personified
As I said the best way to access the stock market is through managed funds and all insurance companies operating in Ireland offer managed funds…
The European Securities Marketing Authority (ESMA) is the authority who categorise every stock share and company in the world into seven separate risk categories from 1 to 7… the lower the number the lower the risk ( e.g. # 1 is cash, # 2 government bonds ) and vice versa the higher the number the most aggressive and riskier ( e.g. # 7: emerging markets … # 6: technology & energy stocks, BRICs countries etc ) Most investors are c. 3 / 4 … all insurance companies adhere to the ESMA approach but most do not bother with # 1 or # 7 as they are deemed too extreme so essentially you only have 5 funds to choose from… makes life simple…
In each fund there are multi choices so even if for example one technology company fails in the # 5 fund, here are many more to take up the slack. Unlike individualising stock selection – you may as well have a blindfold and pin !
Considerations when choosing managed funds
While managed funds offer many benefits, it’s essential for investors to conduct due diligence before selecting a fund. Here are some key considerations:
- Fund performance: Examine the fund’s historical performance relative to its benchmark and peers. While past performance is not indicative of future results, it can provide insights into the fund manager’s ability.
- Fees and expenses: Understand the fee structure, including management fees, performance fees, and other associated costs. High fees can erode returns, so it’s crucial to compare fees across different funds.
- Investment strategy: Each fund has its own investment strategy and focus. Some may concentrate on growth stocks, while others may prioritise income or value investing. Choose a fund whose strategy aligns with your investment objectives.
- Fund manager’s track record: Research the fund manager’s experience and track record. A skilled manager with a solid history can significantly influence a fund’s success.
- Risk profile: Assess the fund’s risk profile and ensure it aligns with your risk tolerance. Some funds may be more volatile than others, and it’s vital to invest in a fund that fits your comfort level. Email me for a free 15 question risk questionnaire to determine your attitude to risk on a scale of 1 to 7 where 1 is the most cautious and 7 the most aggressive.
Managed funds offer a compelling way for individuals to access the stock market, providing professional management, diversification, and liquidity. They lower the barriers to entry, allowing investors of all experience levels to participate in the financial markets. By understanding the benefits and carefully selecting the right managed fund, investors can work towards achieving their financial goals while minimising risks associated with direct stock investment.
Between 1991 and 2020 the average annual growth in the stock market was 10.72% but just bear in mind a gold nugget of advice from one of the world’s richest men Warren Buffet ( 95 years old next May, worth $300billion + and still living in the same house in Omaha Nebraska he bought in 1958 for $31,500 – he pays more in property taxes than it cost him to buy in 1958 ! ) when he said
The stock market is a mechanism for transferring wealth from the impatient to the patient.
In an ever-evolving economic landscape, managed funds stand out as a reliable investment vehicle, enabling individuals to grow their wealth and secure their financial futures with the guidance of experienced professionals. As with any investment, it is crucial to remain informed and proactive, ensuring that your investment choices align with your personal objectives and financial situation. Email me for further advice.