My last post was about unit linked insurance, and the comments in this article have raised the issue of whether it’s worth investing in mutual funds or equities.
I would like to say a few words about this
Many people say that I offer people bank deposits and premium government securities, which many say are not too sophisticated, there are a lot of mutual funds and stocks, and in the long run it will surely be better than bank deposits.
The first thing to clarify is that in Germany, for example, where bank interest rates are 1.5% and inflation is close to 3%, I would not accidentally recommend long-term bank deposits.
But at present, 8-9% bank deposits in Hungary are at 5.2% inflation and we live here.
The alternative investment opportunities with higher risk is not to take no more, but still in the 8-9% of not even meet.
You can look at mutual fund returns on the BAMOSZ website here, you will hardly find any fund that has a 1, 5, 10 or 10 year return that is close to 7-8%. (US dollar funds have performed well in the short term due to the strengthening of the dollar, but the same funds will be worst if the dollar weakens for the same reason.)
Most funds yielded 2-3%, if not minus
But risk would even result in an average return of 8-9%. (I wrote about it) If a fixed-income bank deposit brings you 8% and a more or less reliable government deposit above 9%, then it makes sense for a prudent person to invest in risky equity only if it is expected to last at least 13-14% to. (This is called a risk premium.) And it doesn’t do that much.
If the bank deposit becomes 2%, we will take the equity risk for 7-8%. And then. (I wrote about investment funds here, about hedge funds here and about money market funds here.)
The picture shows the 10-year performance of the Hungarian stock exchange:
Over a 10-year period, the annual return on the Hungarian stock exchange is about 10%, but it has done so with fluctuations (known as science in a big scatter) that you wouldn’t find many with so much risk. If you had bought Hungarian stocks for five years, you would have lost an average of 4.3% each year, and if you were in May 2005, you would now be at zero (which is actually a big drop due to inflation).
When evaluating an investment opportunity
Don’t do what many people do to retrospectively select the few funds that performed well in a year or say they should have bought such a stock between 1999 and 2007. That’s the same as telling which 5 numbers you should have picked out of the ninety lottery numbers last week for the big prize. Big science, tell me what to choose for next week, after all, you only have to find 5 good ones out of 90. It’s easy to pick out two out of every 100 shares that performed above average.
Likewise, when you look at the performance of funds, you either look at all of them, say, absolute return funds, or look at all the funds of a fund manager. But don’t pretend that Good Finance Supra should have been chosen last year and last year.
(When it comes to how an absolute return fund’s performance over a year doesn’t mean how well a fund manager has trodden on a trend, it can also be next to it. For example, if you are fundamentally pessimistic about the fund manager, has performed well in years, if you have always expected it to be bad, but this expectation will always fail in the next five years.
The other thing is that for two to five years, let alone stock markets, but even government securities are avoided, so if you know you will need the money to buy a home in 5 years, you will not even make money. Take a look at the chart above to see how much you would have made out of the 10 million since 2007. (I’ll help you: less than six million.) So it’s a golden rule not to invest money in a five-year term because you are not comforted that you have doubled your money before.