Managed Money

  

Categories: Managed Funds

It's not index funds. Or ETFs. This is managed money.

Analysts ferreting out Truth in accounting filings. Portfolio managers holding breaths and pulling triggers to buy and sell stocks and bonds, hoping to do better than the overall market. The money is actively pushed around, for a fee. And you're signed on to give your money to people to do this, even though some 98% of managed moneys do worse than index funds or ETFs over long periods of time.

So...why do you do this? Well, the basketball tickets...and that delivery of Omaha Steaks...and, well, the broker is just such a nice gal. How could you not?

Related or Semi-related Video

Finance: What are Different Types of Mut...20 Views

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finance. a la shmoop. what are the different types of mutual funds? alright

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well first of all if you haven't watched our video on mutual funds already, well

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go ahead and do that first. it was directed by Steven Spielberg and we need [mutual funds video link]

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to amortize the million bucks we spent on it to hire him. is he really doing

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sharknado seven now? anyway mutual funds. there are actually more of them than

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there are individual stocks. and like hairstyles mutual funds are available in

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a wide variety of options. why? because investors want to buy slices

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and dices and combinations of stocks and bonds to fit a ludicrously large and

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complex set of needs. and with the handy dandy help of computers slicing and

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dicing is really easy today. there are really two categories of mutual funds.

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bond funds and equity funds. and lots of them are combined as well ,like half

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bonds half stocks you know the Centaurs of the finance world.

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well those funds live at either end of the short term risk spectrum like here [stock spliced with bond]

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and here. the short term riskiest funds are high gross mall cap companies often

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technology-related little engines who could who pay no dividend and trade at

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high price to earnings ratios. the least risky are short term bond funds which

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live way over here like a dead body in a lake tied to a cinder block. they don't

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go up much. most mutual funds live somewhere here in the middle of the pure

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stock only or pure bond only ends. so what's a standard mix of stocks and

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bonds in a mixed or balanced fund? well maybe 50 50 75 25 90 10 something like

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that .there is no standard. so let's start with some extremes. bond funds are

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shockingly just a collection of bonds. boring. they pay a bunch of interest they

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come due in a wide range of eras or durations like six months in the future

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to 30 years in the future to even a hundred years in the future. yep Disney

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has a bunch of century bonds they famously launched along with Nicky

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announcing that he was getting a bellybutton ring. note that bonds carry

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many different dials that get turned from interest rates to call provisions

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like how soon the bond which is in theory a 30-year bond could be called

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back by the issuer if rates get cheaper in its future you know stuff like that.

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well as far as dials go a duration is another

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one of them. like how long until the bond comes due .well short-term bond funds

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tend to be extremely safe and short in term and generally carry bonds which

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come due within a year or less. and some bond funds with super short durations

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like less than 90 days are for the most part considered extremely safe. and the [least risky bonds on a graph]

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industry buzzword here is money market fund. and yes it's like there is a market

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for money. some bond funds are able to take on a lot of risk or at least

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relatively more risk than other bond funds. but generally speaking the

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riskiest of the bond mutual funds is meaningfully less risky than a very

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conservative safeish all equity mutual fund. and one key thing to think about

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when you think of risk here there's risk of losing your money of course. debts

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that are due tomorrow are relatively safe when compared with debts due 30

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years from now. a lot can happen in 10,000 plus days. if you invest in a

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risky equity take a stock it's not like one in a million odds it goes bankrupt.

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risky equities go bankrupt all the time. but bonds yeah it really is more like [short term and long term debts compared]

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one in a million kind of odds that they go fully bankrupt. if you invest in the

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safest of bond funds like government bond funds which only keep Treasury

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bills and notes and other forms of what they call government paper you know

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things backed by The Full Faith and Credit of the US government to tax it's

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hard working money earning taxpaying citizens, well you suffer what is called

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inflation risk. if you only invest in super safe stuff and compound at 2% a

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year when you could have taken some risk in a blend of bonds and stocks while the

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risk is that your investment performance underperforms the rate of inflation we

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all live under. that is if you're banking on your bank savings account and 2% or

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something like that working for you when you're old, you'll never get to your

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financial promised land. inflation will make your retirement savings nut worth [man complains that he may apply at McDonalds]

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less and less. if you only made like 2% a year for all that time inflation might

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have been 3% a year and you actually lost wealth or buying power relative to

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what everything actually costs. let's jump to the perspective of taking equity

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risk in just buying an all equity no bond index or mutual fund that

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basically tracks the performance of the overall stock market think the S&P 500.

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over long periods of time like decades the overall stock market has

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historically compounded at about 10 percent a year with dividends reinvested.

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but it's a hugely volatile Beast. some years the markets up 20 percent other

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years it's down 10, but over time it goes up Lots. if you held only cash in a

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savings account you'd be very safe but only get a 2% return over time. you'd

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have paid a huge price for that safety. how much? well in fact we give up 8% a [year to year returns on a list]

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year in compounding and after 27 years of saving well you end up with 1/6 the

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amount you'd have saved had you taken that 8% a year extra risk. remember the

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rule of 72? you divide the interest rate you're getting into 72 and that's the

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number of years it takes to double. so 8 into 72 is 9 it means that in 27 years

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you double your nut 3 times. got it? so equity risk is not a bad thing over time

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there was a time and a place and generally speaking if you have lots and

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lots of time to compound your investment well historically the stock market is a

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great place to be. alright moving fully onto equities now the short-term

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riskiest equity funds are generally those which invest in growth. that is

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they invest in companies which generally don't pay a dividend, so there's no

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cushion as to how low the stock can go if they hit a speed bump in their growth [ high risk stock companies explained]

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trajectory. a given stock trading on hopes and dreams and momentum of the

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promise of curing cancer can be trading at $200 a share one day only to discover

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in the next day's FDA trial results that well it's only succeeding in growing

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hair on the knuckles of Norwegian women. and while the next print of the stock is

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closer to 10 bucks a share, so you can lose your shirt quickly on any one stock

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so when you think about investing with risk spread among many long-term bets

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you think about the diversity and range of investments you make when it comes to

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risky stocks as being leans into growth the areas in the future of the world. so

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the would be cancer curing knuckle hair growing stock is just one stock and a

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big fat basket of growth stocks in a mutual fund. so don't let the fall of

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just one stock and a bath of hundreds terrify you too much. and

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note that we've made a big deal of short-term risk here instead of just

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risk. why? because over time investing in growth stocks has been a really good

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thing in America. the S&P 500 is growthie. let us gaze lovingly at what nine to ten [men do business, exchanging money]

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percent of your compound growth looks like over a hundred ish years.

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if you extracted the non dividend paying portion of it the growth year portion of

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the S&P 500 has grown it's somewhere between twelve and fifteen percent a

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year for a very long time. compare that with a median bond fund growth scenario

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of four to six percent. huge gaps over time in varied investment turns yes, most

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investors don't marry entirely one flavor of investment, they like to spread

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the wealth between bonds and stock. almost literally. so how do you decide

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between bonds and stocks? well generally speaking old people tend to lean more

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toward bonds because they can't take much more risk. and young people toward

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equities. yeah why well time. if you're on the way out the door, so to speak you

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don't want to do anything too risky you just want to play it safe and keep a

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roof over your head in your twilight years. if you're young well you've got

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the luxury of taking big risks failing starting over again if need be so you [young man crashes and burns on a bicycle]

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can more safely invest in equities because over time, well growth will bail

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you out of mistakes. you make when you're young and in the scheme of things

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investing in equities is not even in the top hundred riskiest things you'll do

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when you're young. [list of risky things gets checked off]

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