# Mutual Fund Questions



## adampeps (Jan 21, 2011)

Hi all,

Sorry to bother with more "newbie" questions. After doing some more research I have realized that bad on my current financial situation that Mutual Funds are properly best for me. I would like to eventually move to ETF's but would need a bit more capital first.

I do have somewhat of a random question about getting into Mutual Funds now. I am a bit confused about why I would want to invest into a Mutal Fund now (for instance RBC Canadian Index) with everything being close to 2 to 3 year highs. I'm not saying that these funds cannot go higher than their previous highs, but am wondering how I should strategize myself in order to see some potential gains. Shouldn't I be trying to sell my Mutual Funds at the highs, but buy in at the Lows (similar to stocks)? If so, isn't now a bad time to put some money into Index funds? I'm wondering if I am better off investing in stocks as opposed to Mutual Funds (although the commissions sometimes do not make it worthwhile sometimes).

Hope these questions make sense. I'm trying to figure out if i'm missing something fundamental.

Thanks!


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## HaroldCrump (Jun 10, 2009)

adampeps said:


> I do have somewhat of a random question about getting into Mutual Funds now. I am a bit confused about why I would want to invest into a Mutal Fund now (for instance RBC Canadian Index) with everything being close to 2 to 3 year highs. I'm not saying that these funds cannot go higher than their previous highs, but am wondering how I should strategize myself in order to see some potential gains. Shouldn't I be trying to sell my Mutual Funds at the highs, but buy in at the Lows (similar to stocks)? If so, isn't now a bad time to put some money into Index funds? I'm wondering if I am better off investing in stocks as opposed to Mutual Funds (although the commissions sometimes do not make it worthwhile sometimes).


No, the whole point of passive investing is to avoid market timing and swinging in and out of positions based on what you think is high or low.
The _what you think_ is key here - what makes you believe that you can call the market overvalued or undervalued?
Index funds will provide the following benefits to you:
- Passive indexing, avoid market timing
- Diversification
- Low fees
- DCA without commissions
- Dividends and distributions automatically invested without commissions

If you are a long term investor, the TSX value today shouldn't matter much.
You may, of course, invest in individual stocks.
But by exclusively doing so, you are exposing yourself to lack of diversification risk.
You could do both for now - the bulk of your capital can stay in index funds, while you allocate say 10% for individual stock picking.


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## adampeps (Jan 21, 2011)

HaroldCrump said:


> No, the whole point of passive investing is to avoid market timing and swinging in and out of positions based on what you think is high or low.
> The _what you think_ is key here - what makes you believe that you can call the market overvalued or undervalued?
> Index funds will provide the following benefits to you:
> - Passive indexing, avoid market timing
> ...


Thanks makes sense. I guess i'm having trouble figuring out why I would place money into a mutual fund that has reached the highest it has been for a couple of years. For example, let's say the TSX index over the past 5 years had a high of 10,000, and you invested $10,000 today in an index that mirrored the TSX completly at the high level of 10,000. 1 year down the road the index is at 8,000 (and thus your investment is at $8,000). 1 year after that it reached the high again of 10,000. To me the initial $10,000 investment hasn't gone anywhere in 2 years. I must be missing something .

Thanks again for your help!


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## the-royal-mail (Dec 11, 2009)

Investing of the type I think you are interested in is a LONG TERM thing. Your last post compares today to 1-2 years ago. That is the wrong approach. Need to look at it in terms of the amount of time you want to stay invested. That is x time. Look at x time on your chart. Should look better to you.


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## adampeps (Jan 21, 2011)

Oh ya for sure it's for long term and the chart certainly looks more and more different as you expand the timelines. But who knows if that trend will continue?

My thinking is that it would be to my advantage to invest at lower points that at the highs with mutual funds as well. I don't know, I just can't get my head wrapped around why I would want to invest in a CDN Index right now. Am I hoping that it will grow to even bigger highs over the next 5 years and then sell?


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## Four Pillars (Apr 5, 2009)

adampeps said:


> Oh ya for sure it's for long term and the chart certainly looks more and more different as you expand the timelines. But who knows if that trend will continue?
> 
> My thinking is that it would be to my advantage to invest at lower points that at the highs with mutual funds as well. I don't know, I just can't get my head wrapped around why I would want to invest in a CDN Index right now. Am I hoping that it will grow to even bigger highs over the next 5 years and then sell?


How do you know this is the "high" point?


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## adampeps (Jan 21, 2011)

Four Pillars said:


> How do you know this is the "high" point?


Ya that's what I said a bit above. No one knows if this is the high point, but I am indicating it is just for sake of illustration.

I'm just wondering how much one would play with Mutual Funds. Another example would be the Precious Metals sector. It has seen great increases lately. Would an investor only invest in these indexes if he felt 10 years down the road that the prices would be even higher than they already are?


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## Four Pillars (Apr 5, 2009)

adampeps said:


> Ya that's what I said a bit above. No one knows if this is the high point, but I am indicating it is just for sake of illustration.
> 
> I'm just wondering how much one would play with Mutual Funds. Another example would be the Precious Metals sector. It has seen great increases lately. Would an investor only invest in these indexes if he felt 10 years down the road that the prices would be even higher than they already are?


Investing in equities involves uncertainty. You don't know for sure if the price will go up or down, but you hope it will go up.

If it's certainty you are looking for, then perhaps a high interest savings account or GIC would be more suitable.


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## Rico (Jan 27, 2011)

adampeps said:


> Ya that's what I said a bit above. No one knows if this is the high point, but I am indicating it is just for sake of illustration.
> 
> I'm just wondering how much one would play with Mutual Funds. Another example would be the Precious Metals sector. It has seen great increases lately. Would an investor only invest in these indexes if he felt 10 years down the road that the prices would be even higher than they already are?



If we knew how to time the market the way you suggest, we'd all be very rich!  But, I get the spirit of your question.

Consider thinking about the Mutuals in terms of acquiring units over the long term and ignore the dollar values over the short term. Yes, things may drop again but they'll likely recover (and then drop, then up, on and on). What will your money be doing in the mean time if you don't get in sooner than later?

I wouldn't dichotomize the decision (I have to get in at a good low or not get in at all). Timing a buy-in "perfectly" to the extent of making a HUGE difference over a long time frame is a bit unlikely. You can also buy a little now, and creep your money in when you think it's a good time (assuming no consequences with commissions of course). 

You asked, "Would an investor only invest in these indexes if he felt . . ." 

There are 2 scary words here. "Only" and "felt". These translate to "not diversified" and "guessed/gambled".

Certainly you could put some money toward this sector but IMHO one should never invest only in one area and especially without knowing a great deal about that sector.


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## HaroldCrump (Jun 10, 2009)

adampeps said:


> For example, let's say the TSX index over the past 5 years had a high of 10,000, and you invested $10,000 today in an index that mirrored the TSX completly at the high level of 10,000.


Couple of points:
- The TSX is nowhere near it's 5 year high.
There's lots more room.
The Canadian Index fund that you referred to should mirror the Canadian economy well, given the energy, financial and metals weights.
- How can you (or anyone else) call a bottom or peak.
No one knows.
The purpose of index investing is to mirror the performance of the underlying companies - not guess highs and lows.



> 1 year down the road the index is at 8,000 (and thus your investment is at $8,000). 1 year after that it reached the high again of 10,000. To me the initial $10,000 investment hasn't gone anywhere in 2 years. I must be missing something .


You would have received dividends in the meantime, which should be anywhere between 3% - 5% depending on what you invest in.
Also, 1 year is a very short timeframe for index investing.
For a 1 year timeframe, a cash or near-cash holding is best.

There is no doubt that there are risks with index investing.
Consider the Nikkei index.
Or even the S&P 500 or DJIA in the US.
Those that bought during the peak of 2000 are probably still underwater, not including dividends.
That is a risk we all take with investing of any kind.


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## OptsyEagle (Nov 29, 2009)

Don't try to time the market. By the way. The following article took the time to study what would happen if you dollar cost averaged through the last bear market, instead of trying to time it. Up +15.4% so just keep buying.

http://www.raymondjames.com/inv_strat.htm

I should point out that the last bear market was a dollar-cost averager's dream. Most futures will be a little different from that ... I hope!


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## adampeps (Jan 21, 2011)

HaroldCrump said:


> Couple of points:
> - The TSX is nowhere near it's 5 year high.
> There's lots more room.
> The Canadian Index fund that you referred to should mirror the Canadian economy well, given the energy, financial and metals weights.
> ...


Sorry I was just saying it was at a high for illustration purposes. You point on the dividends is well taken.

It's hard to explain but I am just having a tough time wondering how well my investments would look in 10-20 years. Obviously no one knows but I just see a series of ups and down occurring throughout that time period. And then in the end your left with a possible gain, or a possible loss depending on the dividends you accumulate. My thinking was that one would want to treat mutual funds similar to stocks in that you'd want to sell when the going was good so that you portfolio would constantly increase.

Hope that explains my thinking a bit more


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## KaeJS (Sep 28, 2010)

The mutual funds will more than likely gain over time. Especially on a long horizon. I find it hard to believe that you would lose a lot of money on a 10 year time horizon, especially given the current economic state of the world. 

Everyone else that has posted before me is spot on. Just keep buying in increments. No need to worry about the price. You will see over a few weeks that you've likely made money already on your last buy in. 

Last year I lost $900 in my RRSP in about one week. Within a couple weeks, I gained $1200 back. Nothing to worry about. It makes you uneasy at the time, but you just have to hang in there. 

If you buy an index fund, you shouldnt be disappointed. 

If you still insist on buying on the lows (which is ridiculously impossible to tell) you can look at all the securities a fund is invested in and then individually look at each underlying security. Wait until these securities look like they will turn red, and then buy. But you can't buy into a mutual fund until the close of the next trading day, so it's extremely difficult and time consuming to do this. You'll be very disappointed and I don't recommend doing it.


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## Oldroe (Sep 18, 2009)

It's very possible to time markets. In the last 25 years I've had 4 major opportunity's for market timing. They were all very obvious and all very scary and I profited on 3 of these occasions.

The rest of the time I study and move in and out of very good stocks most with div. 

I disagree that mutual funds are easier to pick. They are far more complicated with many stocks, bonds , derivatives,arbitrage. Then you have shadow mutual of other mutual and then you throw in etf's that are a form of mutual funds and now throw in all the fee's and front load, back load.

The stat is like 1/3 don't make money so it's your job to stay with that top 3rd. Good Luck with it.


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## KaeJS (Sep 28, 2010)

Oldroe said:


> It's very possible to time markets. In the last 25 years I've had 4 major opportunity's for market timing. They were all very obvious and all very scary and I profited on 3 of these occasions.


You have experience.

The original poster more than likely does not considering they are asking questions about mutual funds.

I think the original poster should start with something a little less intensive.

Even professional analysts screw up market timing.


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## Oldroe (Sep 18, 2009)

You are very right not often but very profitable and very scary.

My real advice is to go slow they don't give money back.


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## adampeps (Jan 21, 2011)

KaeJS said:


> You have experience.
> 
> The original poster more than likely does not considering they are asking questions about mutual funds.
> 
> ...


Ya exactly, I am new and don't think I have the tools to properly spot tops and bottoms. My thinking was wait until I see a nice increase in a particular Mutual Fund, and sell it when I felt comfortable. 

As a long term investor, I'm also curious what investment would be best for me. From what I read with less than 30K at my disposal that ETF's are not the right way to go yet. Which is why I began looking into mutual funds. I wasn't sure if investing in a Canadian Index fund would be a good idea for me or if I should look for a Dividend fund or something so that I should receive money regularly. 

Thanks again everyone. I know this is a vague question thread, but am learning quite a bit!


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## KaeJS (Sep 28, 2010)

You keep saying you are doing this for the long term, so you should invest in something that is primarily equities (say, maybe 70%?) equity based.

It depends on your risk tolerance. More risk usually results in more rewards. Equities are meant to be grown. If you've got a 10 year horizon then you should be looking toward something like this. If you are risk averse (meaning you won't sleep at night if you start losing money) then maybe you should go for something that is a bit safer.

What is your age? Wife? Kids?

Age plays a big factor. When you are young, you should take more risks and accept more drastic changes in price and volatility since you have a long time to sit on the investments should they stay sour for a while.

Example: I am 20 years old, so about 80% of my money is in risky investments (equities, hot sectors, junior companies). The other 20% is in dividend paying funds or stocks, multi-caps (big companies with lots of cash and assets that arent going anywhere anytime soon), and a little bit of cash.

Someone that is 60 years old may have 20% equity holding since they are most likely going to need their money within a few years for retirement. The other majority of their investments would probably be in dividend paying stocks and high interest savings accounts.


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## MoneyGal (Apr 24, 2009)

adampeps said:


> Ya exactly, I am new and don't think I have the tools to properly spot tops and bottoms. My thinking was wait until I see a nice increase in a particular Mutual Fund, and sell it when I felt comfortable.


The concept you are looking for here is "rebalancing." You don't have to look for highs or lows; the portfolio will provide them for you...and you periodically rebalance your holdings to return to your original allocation, either when a trigger is pulled (i.e., holdings have drifted by more than x percent), or when new money is added, or according to a schedule (i.e., every quarter).


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## Larry6417 (Jan 27, 2010)

Adam:

Congratulations on taking advantage of your financial future. I saw a recent interview with Burton Malkiel, an economist with Princeton. The interviewer asked him, rightly, whether his belief in economic theories had been shaken. With great humility, Malkiel said that history has made him question many things he previously took for granted. However, the one thing he was more sure of than anything was this: higher investment expenses lead to lower returns for the investor.

One of the very annoying things you'll find is that different people on this forum have very different opinions on investing. Some people here will extoll the virtues of market timing while others will disparage the practice. One thing that (almost) everyone will agree with is that lower investment costs are better than higher investment costs. If you want to increase your returns, the simplest and most effective thing you can do is to get rid of your mutual funds and replace them with index funds or ETFs. One myth is that you need a large amount for ETFs of index funds. That's not true. One good set of index funds is from TD. See www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/low_cost.jsp


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## dogleg (Feb 5, 2010)

Adam....: I think HC and Larry have given you excellent advice. Personally I have no use for mutual funds; everybody but you generally make all the money. If you haven't already, just read Reynolds "Naked Investor" and I think that will end your interest in MFs. If you haven't the time to spend doing research on various stocks in the commodities area for example I think you are best to work with ETFs as was suggested. I think one can safely bet that people who get rich in the market don't do it by investing in MFs. Anyway good luck.


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## Sherlock (Apr 18, 2010)

Index funds ARE mutual funds.


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## OhGreatGuru (May 24, 2009)

adampeps said:


> ... I am a bit confused about why I would want to invest into a Mutal Fund now (for instance RBC Canadian Index) with everything being close to 2 to 3 year highs. ...
> 
> Thanks!


Your data selection is faulty, TSX is still well below highs of 2007-2008. And taking into consideration inflation and long-term growth rate of TSX there is every reason to project further growth. Yes, you would have made more money had you invested at the bottom of the market, but hindsight is always 20/20.

Besides, what else would you put it in at today's miserable interest rates?


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## w0nger (Mar 15, 2010)

OhGreatGuru said:


> Your data selection is faulty, TSX is still well below highs of 2007-2008. And taking into consideration inflation and long-term growth rate of TSX there is every reason to project further growth. Yes, you would have made more money had you invested at the bottom of the market, but hindsight is always 20/20.
> 
> Besides, what else would you put it in at today's miserable interest rates?


all on black... now spin the wheel...


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## adampeps (Jan 21, 2011)

Larry6417 said:


> One myth is that you need a large amount for ETFs of index funds. That's not true. One good set of index funds is from TD. See www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/low_cost.jsp


I was looking into these but I have an account at Scotia iTrade which does not allow you to trade these.

At what point should a person consider investing in ETF's (monetary wise)? The couch potato website I read showed 30K. I'm just starting out and have less than 10K.

Thanks!


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## the-royal-mail (Dec 11, 2009)

I think index funds are great. Low MERs and babysitting, just make sure the portfolio is properly allocated and do it all with index funds if you can. You'll save $$$. Your bank should have at least a couple index funds available, maybe toss in 5-10% for some sort of precious metals fund, just for fun. At the end of the day the decision rests with you, but non-index/ETF funds have pretty high fees.


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