After having some working idea of what a mutual fund is from the previous post, we may now proceed further by determining whether or not we are ready to invest in mutual funds.
This post therefore hopes to continue with our mutual fund series by giving some ideas or tips to determine our readiness to invest in mutual funds.
And as the favorite saying goes, we will make this “short and sweet.”
1. Ownership of a Home
Most investment experts advise investors to own a home before attempting to invest in mutual funds or stocks. This is for practical and other reasons.
Having a home means a roof above your head come what may. It is a basic necessity that must be met before we commit funds to something that would have the possibility of getting lost.
The reason is fairly obvious. The ownership of a home gives one a great psychological advantage, a sense of security and stability that can favorably affect your investment predispositions. It is also considered a reliable hedge against inflation since real estate generally appreciate in value over time.
The other reason is that investing is by its very nature a stressful activity. Risk (the possibility of loss) is by its nature linked with stress and it is highly advisable that people who deal with risk take measures to minimize the stressful impact of a negative outcome.
There is no better way to deal with such stressful impact than to make sure that come what may, we have a roof over our heads. We make sure that whatever the outcome, we don’t live in the streets or go straight to the poorhouse.
2. Availability of Investable Money
Investable money is generally defined as money that one will not be needing, at least, in the next 3 to 5 years. Investment experts are almost all unanimous in advising against investing of funds which you will be needing in a year or two.
We cannot command or intend that our kids’ tuition fees for next semester be sourced from gains in mutual funds or something like that.
If that is what you have in mind, chances are that you will sustain losses. You may be forced to redeem your shares at times when your shares have not even recouped the 3.5% load on your entry to the mutual fund.
Worse, the market may just have suffered a “correction” and your NAV is substantially below your entry point.
There may be exceptions, of course. At times we can park our savings in mutual funds with low front-end “load” and which are mainly invested in short term debt instruments.
When I was still working at a bank in the Middle East Kingdom, I used to park my savings in Short Term Dollar funds, while trying to find opportunities in Philippine stocks. Short Term Dollar funds are mutual funds run by banks in the Kingdom and primarily invested in US Treasury bills.
Nowadays, with interest rates in US Treasury Bills close to zero, I don’t think this is still advisable. I think the better alternative is to put it in savings account in the country. At least the rates are higher and you are covered by deposit insurance (PDIC).
3. Practicing Detachment, Control of Emotions, and Other Psychological Preparations
If you are the type of person who panics easily or gets so worried about investment at the slightest drop in the stock index, then it is better to spend more time to educate yourself and try to practice control of emotions first.
It is important to bear in mind what Warren Buffett’s mentor Benjamin Graham said:
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
All good investors exercise detachment to a substantial degree. It is not really the kind or extent of detachment practiced by monks or yogis. Just enough sense of detachment to prevent us from getting devastated if the outcome is far off what we desired.
Practicing emotional control and detachment, however, does not occur in a vacuum. Material conditions have to be arranged in such a way as to make it easier for a person to practice them.
Thus, owning a home first and having investable money as mentioned above, help a lot to enable a person to practice emotional control and detachment.
Aside from detachment, patience and perseverance are necessary virtues. If these are necessary for success in other fields, they are even more necessary in the field of investments, whether in mutual funds, stocks or others.