Is taking a risk - gambling? (part 1)
The Advocate, Wednesday June 1, 1994
In last month's article, "Buyer beware of Mutual Fund mania" I was concerned that many unsophisticated investors have bought mutual funds from banks without understanding the risks. In this two part series, I hope I can shed some light on this subject.
One of the reasons I have heard from people afraid to invest in mutual funds is, I don't want to take a chance by gambling with my money and lose everything.
Because of things they have heard from others who may have lost some money, they equate mutual funds with the stock market. That is incorrect. Many types of mutual funds have nothing to do with the stock market. However, one category that the stock market affects is know as Equity Funds.
What bothers most people is the risk of another so-called stock market crash. The one-day decline, October 19, 1987, of the U.S. stock market was approximately 25 per cent. Twice the magnitude of 1929. But did it really crash? Less than three years later it regained all it lost that day and went on to new highs.
An outcome different from those who predicted another depression. The severe recession didn't take affect until mid-1990. This seemed to make the doom and gloomers happy. They felt this was the beginning of the depression they had predicted. They were wrong again.
People were scared. Thanks to the sensationalism spawned largely by the media, they ended up selling at the worst possible time.
They didn't understand that it was a temporary paper loss. Because it was sensationalized so much in the press that the great depression predicted was imminent, people believed what they read in the paper and heard on TV rather than the real truth.
I knew that it was only temporary and a tremendous opportunity to buy at record low levels. Some of my clients who understood this and took my advice to buy have made some handsome returns since. Hindsight is 20/20.
Why were most people selling and only a few buying then? Fear! Fear is the wrong reason for making a major financial decision. It sometimes bypasses common sense.
When investing in Equity (growth) Mutual Funds you need to have at least a five-year horizon. I invested $30,000 July 23, 1987 in an equity mutual fund near
the top of the market. I took my own advice and didn't sell but bought more.
At the time I felt as if I was the only one saying it was a great time to buy and not sell. I remember how I had to hold a lot of my clients' hands then to reassure them the tempory losses would recover. Not only have they recovered, but recently some spectacular gains have been made.
The fund I invested $30,000 in JUly 23, 1987 was the Templeton Growth Fund. I waited until December 20, 1988 before I started to take a regular monthly income of $250. Up to May 20, 1994 I have received a total income of $13,000. Not only have I retained my capital but made a small increase. The fund is now worth $32,570.59.
I have a chart available that shows how a withdrawal plan works with the Templeton Growth Fund.
It clearly shows how you can take a substantial monthly income while your capital continues to grow. It covers January 1, 1964 to December 31, 1993.
In spite of some severe recessions during tthat period, $100,000 invested with 12 per cent withdrawal plan of $1,000 a month for 30 years is worth $3,033,873.17 of remaining cashable value. I would be glad to send it to anyone who requests one.
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