Is Taking a Risk Gambling?
Country Routes - February, 1998
Originally, I wrote this two part series because I was concerned that many unsophisticated investors have bought mutual funds from banks without understanding the risks. In September, I wrote about "Volatility" due to the violent swings in the market. Now after the "Asian Contagion" I felt this topic should be addressed again. At this critical juncture, at the end of a long bull market, one has to seriously consider where to put one's money.
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 cateogy that the stock market affects is known as Equity Funds.
What bothers most people is the risk of another so-called stock market crash. The one-day decline October 19/87 of the U.S. stock market was approximately 25%. 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 effect 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 T.V. 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 then 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 by-passes common sense. When investing in Equity (Growth) Mutual Funds you need to have at least a 5-year horizon. I invested $30,000 July 23/87 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 reasssure them the temporary losses would recover. Not only have they recovered, but recently some spectacular gains have been made.
The fund I invested $30,000 in July 23/87 was the Templeton Growth Fund. I waited until December 20/88 before I started to take a regular monthly income of $250. Up to December 20/97 I have received a total income of $26,000. Not only have I retained my capital but made a small increase. The fund is now worth $32,940.94.
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 1/64 to December 31/96. In spite of some severe recessions during that period, $100,000 invested with a 9% indexed withdrawal plan starting at $900 a month for 32 years is worth $3,994,635 of remaining cashable value. It compares this with a 10% investment which ran out of money in 1981. I would be glad to send it to anyone who requests one.
If you have any questions, please call Reg Borrow at (519) 855-6639. He is an Independent Financial
Consultant with Regal Capital Planners Ltd.
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