Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
Let me first give all of you my profoundest apologies for my recent 4-5 month sabbatical. Secondly, let me explain why it happened. For the sake of confidentiality and anonymity, I won’t say what the specifics are, I was recently offered the chance at an amazing new opportunity and I pursued it. Thirdly, I got it! Fourthly, as hard as the decision was to make, I’m closing the blog down as I cannot in good conscience continue doing it at all, let alone well, with my new responsibilities in addition to my day job as a physician.
So, here we go with big finale…
We discussed index funds at each of the market capitalization levels last time. There are over 9,000 mutual funds in the US alone and they intersect every single kind of stock grouping you can imagine and many others you cannot.
So, there’s no point in trying to rummage through each and every fund out there. That’s exactly what other blogs, TV shows, and magazines (digital or virtual) are for, so feel free to peruse them at your leisure…but always be mindful of not just your money and what risks you may be pouring it into, but exactly what your purposes of said investment is.
Rather than dig through the nearly ten thousand funds, let’s talk about funds that are directed in a very easily identifiable way.
Sector Funds
Sector funds are ones that are comprised entirely of the stocks of companies in one particular
industry (eg, technology) or sector of the economy (eg, energy)—thus the name. If it’s a sector you know a lot about such as health care or pharmaceuticals and, as always, your risk tolerance is high enough, then consider it if you don’t believe there is anything lurking in the near future to tank the sector. If you find yourself saying/thinking, “I don’t know enough about any one sector to know what the pitfalls are or when a downturn might be coming up,” then DON’T INVEST IN SECTOR FUNDS!
To be more broad of a category, there are specialty funds under which all sector finds fit. In other words, all sector funds are specialty funds, but all specialty funds are not sector funds. (Damn Venn diagrams!) Some examples of specialty funds that aren’t necessarily sector funds (ie, sectors of the economy) include real estate or even a better example would be commodities (ie, a basic good—coffee beans, sugar, corn, gold, cotton, etc—used in commerce that is interchangeable with other goods of the same type; commodities are usually used as inputs in the production of other goods—coffee, candy, food/candy, jewelry, and clothes respectively for example).
The most important things to note for sector funds is being a more experienced investor of moderately high risk tolerance before you dive in AND as someone said long ago (ie, one paragraph ago), if you find yourself saying/thinking, “I don’t know enough about any one sector to know what the pitfalls are or when a downturn might be coming up,” then DON’T INVEST IN SECTOR (OR SPECIALTY) FUNDS!
Fixed Income Funds
These funds are ones that buy investment products with a fixed rate of return such as government funds and/or corporate bonds. The specific fund will tell you what it is comprised of and pays you dividends from their proceeds or upon you selling the fund at a higher value than you bought it at earlier or possibly both. Government bonds tend to be lower yield and thus cost you less in fees whereas corporate bonds often (but not always) yield more and consequently cost more in fees. Don’t chase returns without understanding how much your costs are. A higher yield fund could cost quite a bit and return you less than a lower yield fund with lower fees…so look before you leap!
Equity Funds & Index Funds
You already know what these are (and shame on you if you don’t) if you’ve been reading the blog and paying attention while you’re reading.
Equity funds are ones that invest in individual companies’ stocks. So this is where your small cap, mid cap, large cap, growth stock, and value stock funds (plus every combination thereof) are categorized under.
Index funds…well, if you don’t know what index funds are at this point, I can’t help you. Prior blog posts went over both indexes and index funds in detail. Read them again, people!
Moving on…
Balanced Funds
These funds invest in a mix of equities (eg, stocks) and fixed income securities (eg, bonds). So, the more stocks you have in a fund, the higher the possible yield/returns, but also the higher the risk. A fund with more bonds or other fixed income securities than stocks will generally yield lower returns, but carry lower risk of loss. So, again, the specific fund you choose is directly linked to your risk tolerance.
So…figure out your risk tolerance before you go shopping. It’s no different than doing some Internet research before you go shopping for a big ticket item nowadays.
Happy hunting!
Fund of Funds
Sarcastic Reader: What in the hell is this??
Dr. Scared: This is it! This is it!! This is how they screw you!!!
Dr. Unwise: This sounds..weird…fishy even…maybe
Dr. Spend It All: No can do, boss. Gotta get that new Maserati.
Physician Wealth Thyself: Guys, while it’s kind of sad that is our last little round table, I will not miss you…at…all.
Sarcastic Reader: Ouch, As the kids say, savage!
PWT: ANYWAY…
Fund of Funds are ones that, believe it or not, invest in mutual funds. And they can be of any type. So, the fund of funds can be comprised of all purely small cap funds, mid cap funds, large cap funds, growth stock funds, and value stock funds (plus every combination thereof)
Sarcastic Reader: So, let me get this straight…instead of owning pieces of stocks or owning pieces of funds that own pieces of stocks…you own pieces of funds that own pieces of funds that own pieces of a company’s stock…right?
PWT: Yes. Exactly. Nailed it!
Dr. Unwise: Whoa! It’s like a Russian nesting doll of investing…
Dr. Spend It All: Can’t go from 0 to 60 in 5.8 seconds in a Fund of Fund though, bro!
Dr. Scared: So, what’s the catch with these fund of funds thing?
PWT: The expense ratio (ie, the fee you are charged for owning the fund) in a fund of funds is usually higher (sometimes significantly higher) than that of a standard fund
Dr. Scared: So this is how they screw you…
PWT: Yeah. Possibly, depending on the expense ratio. Finally, you got one thing right. If that isn’t a sign to end this blog on, I don’t know what is.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
This is it…
It feels odd to say this after such a short time (which doesn’t seem short at all behind the scenes), but this is truly the end.
Though the end of any venture is always bittersweet, I’d rather leave on a high note knowing I gave it my best than giving a half hearted effort for another 6-12 months and then ended it. So, I hope you all learned a lot and even enjoyed it along the way.
Talk to you soon.
Until next time…in another place…in another way…farewell and best of luck to all of you…